Non Convertible Debentures (NCDs) are a good source of earning fixed interest on a regular basis. However, many individuals are often confused as to what kind of instrument this is.
The only difference is that NCDs do attract a TDS, while company fixed deposits have a TDS that is applicable. Learn the difference between both instruments here
How and where to buy NCDs?
Non convertible debentures are initially issued by companies at different face values.
Thereafter, these NCDs are traded on the exchanges.
You therefore have two options: you either subscribe to the NCDs when the offer is on or you buy the NCDs from the market. That is from the National Stock Exchange of the Bombay Stock Exchange, where these NCDs are publicly traded.
When you buy these debentures, you will get interest, just like the initial holders of the NCD.
On the expiry of the term of the NCDs, the company concerned will payback the sum along with the accumulated interest as well as the principle amount.
Why you should buy NCDs from the exchanges?
If you buy NCDs from the exchanges, your yield can go up if you are able to buy the NCDs ar a bargain. Let us understand this with an example.
Say, company A issued NCDs of face value of Rs 100 with an interest rate of 10 per cent. Now, if the company pays an annual interest of 10 per cent your yield is 10 per cent.
Now, if you buy the NCDs at Rs 950, which is highly possible as NCDs can trade below face value, your yield goes higher, as you have bought it much lower than the face value.
These days it is extremely difficult to get Non Convertible Debentures at below the face value, as interest rates have fallen by almost 1 to 1.5 per cent in the last 18 months.
Also, many non convertible debentures are unsecured. So, if the company is not doing well, there are bright chances of a default. So, before you invest in a NCD, you have to make sure that it is a secured NCD. If not, you have to ensure that the NCD is from a highly rated company.
It is always a good idea to go in for safe instruments, though we have hardly heard of any major defaults from companies who have issued NCDs.
There are many listed NCDs, including those from Gold loan companies like Muthoot and Mannapuram Finance that have issued NCDs in the past.