How to invest in Non-Convertible Debentures
What's the story
Investing in non-convertible debentures (NCDs) can be a smart move for those looking for fixed income and lower risk than stocks. NCDs are debt instruments that companies issue to raise funds, promising a fixed interest over a period. Unlike convertible debentures, these cannot be converted into shares, keeping the investment straightforward. Here's how you can invest in NCDs without losing your mind.
#1
Understand the basics of NCDs
Before you start investing in NCDs, it is important to understand what they are. These are issued by companies to raise capital and come with a fixed interest rate. The tenure of NCDs can range from one year to 10 years or more. Since they are not convertible into equity, they offer predictable returns but also come with the risk of default if the company fails to repay.
#2
Assess risk factors
Assessing risk is key while investing in NCDs. Check the credit rating of the issuing company, as it determines its ability to repay. Higher-rated companies tend to be safer but offer lower returns. Also, consider market conditions and economic factors that could affect a company's performance and its ability to honor its debt obligations.
#3
Diversify your portfolio
Just like any other investment, diversifying your portfolio with NCDs is important to minimize risk. Instead of putting all your money into one debenture, consider investing in different companies across sectors and credit ratings. This way, you can balance out potential losses from one underperforming asset with gains from others.
#4
Monitor interest rates
Interest rates play a major role in determining the attractiveness of NCDs at any given time. When interest rates go up, new NCDs may offer higher yields than existing ones, which can affect their market value if you decide to sell before maturity. Keep an eye on macroeconomic indicators that influence interest rate trends.
#5
Evaluate tax implications
Investing in NCDs has tax implications that you should be aware of. The interest earned from these instruments is taxable as per your income tax slab rate. However, if you hold them until maturity and they are listed on recognized exchanges, you may be eligible for long-term capital gains tax benefits when sold at a profit.