Non Convertible Debentures (NCDs) Compare

Additional Useful Information

• Non-Convertible Debentures can be of two types –
• Secured Non-Convertible Debentures – These are Non-Convertible Debentures which are backed by collateral (typically, the company’s assets such as property, land, machinery etc.). Hence these are considered safe.
• Unsecured Non-Convertible Debentures – There are Non-Convertible Debentures which are backed only by cash flows of the company issuing them. Hence, they are considered riskier compared to the secured Non-Convertible Debentures.

• When an investor purchases Non-Convertible Debentures, the issuing company is bound by a legal contract wherein they are obligated to make predetermined interest payments to the investor.

• Every NCD is assigned a credit rating by a credit rating agency. Higher credit ratings mean that the safety of the investment is higher, and therefore risks involved are lower. However, lower credit means that the risks of investing in such bonds are higher.

• Investing in Non-Convertible Debentures is suitable for investors who desire regular passive income.

Returns *

• Non-Convertible Debentures do not guarantee any returns. However, the probability of negative returns are medium.

• Typically, Non-Convertible Debentures can generate returns ranging from 5.5% to 16% per year, depending on maturity period and their credit rating.

• Non-Convertible Debentures usually provide higher returns as compared to bank fixed deposits and government bonds.

• Secured Non-Convertible Debentures generally provide lower return compared to Unsecured Non-Convertible Debentures. This is due to the lower risk associated with the Secured Non-Convertible Debentures.

Risk Level

• Non-Convertible Debentures are considered medium risk investments.

• Non-Convertible Debentures have a credit risk associated with them. This means that if the company issuing these bonds default in their commitments, the investor can make losses on the investment.

• Non-Convertible Debentures become riskier during times of economic downturn. This is because the chance of the issuing company defaulting on the interest payments are higher in these times.

• Since NCDs are tradeable in the secondary markets, some amount of interest rate risk also exists. When the interest rates determined by the Government go down, prices of NCDs rise and when interest rates rise, prices of NCDs decrease.

• Based on the credit risk, all Non-Convertible Debentures are provided with a credit rating by a credit rating agency. This helps in determining how safe or risky the Non-Convertible Debentures are. Investors should analyse this rating to understand the risk more accurately.

Liquidity

• Non-Convertible Debentures are moderately liquid.

• They can be sold at any given time prior to maturity. However, it is possible that there may not be a buyer for the bond. There is no guarantee that the bond will be sold.  In this event, the investor continues to hold the bonds till maturity and earn the interest till maturity.

• The liquidity of NCDs may be lower than other government debt instruments and bonds.

Interesting Facts

• The highest quality Non-Convertible Debentures on credit rating scales are commonly rated as "Triple A (AAA)” debentures, while the lowest quality Non-Convertible Debentures are rated as "Junk (BB and below)" debentures.

• Lower rated debt instruments offer higher yields than higher rated instruments, but higher yields come with higher credit risks.

• Bonds and NCDs are very similar, and majority of their characteristics are the same.

Tax Implications

• Earnings received from Non-Convertible Debentures are taxable.

• Interest earned by investors from Non-Convertible Debentures are to be added to their total taxable income and taxes are required to be paid as per the income tax slab.

• When investors sell Non-Convertible Debentures prior to maturity, the difference between the Sale Amount and Purchase Amount is typically called “Capital Gain” or “Capital Loss” (if sale amount is lesser than the purchase amount).

• The tax that the investor must pay on Capital Gain is –
• Situation 1 – If the Non-Convertible Debentures are sold within a period of 2 years from investment, the Capital Gains earned (called Short Term Capital Gains) are to be added to the taxable income of the investor and taxes are required to be paid based on the applicable income slab.
• Situation 2 - If the Corporate Bonds are sold after a period of 2 years from investment, the Capital Gains earned (called Long Term Capital Gains) are to be taxed at the rate of 12.5%.

• There is no tax in case of “Capital Loss”.

Where To Invest

• https://www.icicidirect.com/fd-and-bonds/ncds-listing

• https://www.hdfcsec.com/offering/ncd-overview