Introduction to NCDs
NCDs are Non Convertible Debentures. Non Convertible Debentures mean debentures that are not convertible in equity. These are debt instrument which is issued publicly or privately by corporate in India. Public sector companies, fully owned government companies and private companies all raise funds through NCDs in India. Here funds can be secured or unsecured or guaranteed by different entities including government guarantee. Here the return is directly related to risk if the risk is high returns or coupon rates are also high, if the risk is low then returns or coupon rate is also low.
How to invest in NCD Online
If you want to invest in NCDs then you can invest in three ways. The first one is through Debt Initial Public Offering (This is just like regular stock IPOs) Secondly you can invest through the Secondary Market (just like buying stocks from stock exchanges, before buying any NCD from the secondary market you should check the interest record date) and lastly you can invest here through other intermediaries who deal in debt instrument.
Best NCD Definition
Best NCDs are those NCDs that provide higher returns with less risk. In India generally, companies with a high rating and with a high reputation provide less risky NCDs with higher returns, for example, Tata Capital Housing, Tata Capital Financial Services, L&T Finance etc these are all reputed and AAA-rated companies that provide NCDs as an investment. In these companies, it is assumed that funds are secured and the company will honour all interest payment and maturity payment on the redemption date. If we go for more secured investment then our return will get affected, for example, in India, public sector companies or PSU companies and government-owned companies provide more safety compared to highly rated private sector companies because here the company's ownership is with government or with government owned company and generally government make sure that no public sector company defaults. Here are the examples of public sector companies- PFC Ltd. REC Ltd. NHPC Ltd. IRFC Ltd. etc and wholly-owned Government Company example is NHAI.
If we go for higher returns we have to also go with higher risk. We can invest in some of the AA-rated companies which provide returns higher than AAA-rated company. Some of the examples of AA-rated companies is Muthoot Fincorp, Muthoot Finance and JM Financial Product etc. These are all good rated companies with a good track record. You can also go with less rated companies where returns are higher but the risk exposure is also high.
In NCD Investment you should always remember to diversify your NCD portfolio because NCDs are always a risky investment and the main risk is default risk. Default risk means your investment can destruct in seconds if the company fails to make a payment on your interest or redemption.
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Reference:- Basic of Bonds(Video, Hindi)