5 things to know before investing in NCDs
NCDs are fixed income products, which means they promise to give you a fixed interest rate at the end of the tenure
Mumbai: In the first week of the year, Mahindra and Mahindra Finance Services Ltd announced non-convertible debentures (NCDs) to raise money. Recently, mortgage lender Housing Development Finance Corp. Ltd (HDFC) also announced that it will look to raise ₹45,000 crore via NCDs in this year through different tranches. Shriram Transport Finance Co. Ltd will issue NCDs from January 7. NCDs are one of the options companies use to raise money. “In 2019, you can expect more NCDs to hit the market. Commercial paper was very easy for the companies to raise money for shorter tenures. NCDs are a more long-term funding compared with commercial papers. Hence, we can expect more traction in the NCD market and it will be significantly higher than what we saw in 2018,” said Abhimanyu Sofat, head of research, IIFL Securities Ltd. Considering that more NCDs are going to be launched, here are five things that you should know about NCDs before investing:
Check for credit rate
NCDs are fixed income products, which means they promise to give you a fixed interest rate at the end of the tenure. However, if the company defaults you may not get the money. Hence, it is important for you to check the rating for the product. Opt for AAA-rated NCDs. Consider the reputation of the company as well as track record. If confused look for multiple ratings for the same instrument.
Not worth investing if in highest tax bracket
NCDs are taxed at your slab rate, which means if you are in the highest tax bracket, the interest you earn will be taxed at 30%. Hence, your post-tax returns will be much lower. NCDs can work for those in the lower tax category or those with no taxable income. While investing in any instrument, always factor in your post-tax return and not just the coupon rate.
The interest rate on most of the AAA-rated NCDs is usually a little higher than bank fixed deposits, around 9%. However, the lower rated NCDs can give you higher interest rate. Don’t look at interest rate on NCDs in isolation. The higher the return, the risk is also likely to be higher. You don’t want your money to get stuck with a company in case of a default.
Pay out options
In case of payout, you can pick monthly, quarterly, annually or cumulative. When you opt for cumulative returns, you will get a slightly higher return compared with, say a monthly payout. The reason to pick the payout option depends on when you need the money and for what purpose.
Know that the tenure of the NCDs is usually long-term. Hence, it works for those who are comfortable staying invested for a longer duration fixed income product. Again don’t look at the instrument in isolations. Factor in you asset allocation and check if it will work for your overall portfolio. There are multiple other fixed income products available in the market. Hence, compare NCDs with other alternatives before investing in it.
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