Should retail investors invest in NCDs?

Most retail investors want returns of a bull market but with the safety similar to that of bank fixed deposits (FDs). The present low interest environment is making bank deposits less attractive. Let's us find out whether corporate NCDs would be an ideal choice for risk averse investors.

Non Convertible Debentures (NCDs) are fixed tenure financial instruments issued by a company with a promise to pay a fixed interest to the investor. They are basically loans availed by a company which cannot be converted to equity.

NCDs offer competitive rates when compared to FDs, this is their biggest attraction. Also, investors who are looking for consistent monthly returns over a long period of time in the range of one to five years can opt for NCDs. They also provide a means of portfolio diversification as they are debt instruments.

All NCDs have the benefit of direct bank credit of interest payable on the investment. But investors needs to hold a demat account with a full-service brokerage or bank to subscribe to NCDs.

On the taxation front, no tax is deductible at source (TDS) as it is in the case of FDs. But the interest earned during the year is part of your income and is entirely taxable according to your tax bracket.

Although NCDs are listed on the stock exchange, they are have lower liquidity than FDs. You might have to wait until maturity to withdraw the sum that you have invested in NCD. So you should opt for them only if you plan to invest for a long-term.

NCDs are of two types; secured and unsecured. Secured NCD is backed by the company's assets while unsecured NCDs have no such backing in case the company defaults. Always opt for secured NCDs. According to SEBI's guidelines, all companies issuing NCD are required to get their issue rated by credit rating agencies such as CRISIL, CARE, Fitch or ICRA. Thus there is a lower risk of unfit companies issuing secured NCDs. However, in the light of NBFC crisis, investor prudence is advisable.

NCDs open for subscription

Offlate, the high credit crunch faced by non-banking financial companies (NBFCs) is pushing them to issue NCDs to fund the operations. This serves as an ideal opportunity for investors wanting to diversify and invest for the long term at higher interest rates. But before committing your money, investors need to check out the company's overall business model, financials and the credit ratings of NCD. Also check for the rules regarding redemption of the principal amount, yield or the annual return percentage of the NCD.