Difference between revisions of "Non Convertible Debentures"

Revision as of 19:51, 18 September 2018

This lesson is in continuation to our Investment Products.

Non Convertible Debentures (NCD)s are debt securities - also called fixed income instruments.

Most modern debentures are listed and traded on stock exchanges and are now providing liquidity.

Debt investors can use this feature to earn periodic coupon as well as gains from appreciation in price when interest rate moments are favorable.

On the other hand, adverse interest rate moments will lead to loss in value.

In such situations, they eat into the periodic coupon income earned on the security.

The liquidity in the Indian bond market is low.

So, even though the NCDs are listed, sellers might not be having that much advantage and have to depend on the mercy of buyers in case they wish to sell their NCDs.

Further, NCDs are taxed according to the tax slab of the investors.

This will further make them less appealing.

How to invest in NCDs

What is the procedure to invest in NCDs .... where can we get the information for Cholamandalam NCDs having coupon rate 12.9 & 12.5%. Thanks

You can buy already listed NCDs or apply for those in NFO period using from your stock broker.

You can invest in an NCD by submitting a paper application form at the issue, with financial advisers or their agents.

Some stock brokers , such as ICICI Direct, provide online interface so that you can invest in them online.

However, considering the less brokerage income involved, not many brokers really offer them leaving out the traditional paper-application-form route to us.

You can locate the NCD application form on the Colamandalam website or from the Registrars website (Karvy is popular in this).

The 1-page application captures your basic information. So keep a Chq leaf and demat booklet handy when filling it.

After filling the form, keep a photocopy of your application form and filled in cheque leaf.

You can submit the form at your nearest Registrar office or at Cholamandalam offices. Do take acknowledgment slip (located at the bottom of the one-page application form.

Save you application number, cheque number and cheque date in your mobile phone for allotment tracking.

You can give a cheque towards the deposit amount. Interest will be paid to you to your bank account.

Once the allotment is over, you will get a certificate or a demat update for allotment mentioning appropriate units.

Remember returns from NCDs are taxable and will be equal to your tax slab (treated as interest income).

Disadvantages of NCDs

Question: Why I don't like NCDs / Disadvantages of an NCD (over say Debt funds)

1. NCD is a Deposit and returns for deposits are (almost always) taxable. NCD returns are taxable. Debt funds offer indexation benefit under long term capital gains

2. Liquidity: Not all NCDs can be sold whenever you want. Listed NCDs can be sold but you should have opted for that. Debt funds can be sold whenever you want money.

3. Diversification: Dependence on a single instrument is always a problem. What if the company in which we deposited could not make payment on time? While this is a rare possibility, debt funds counter this with diversification.

Related Lessons

• Sukanya Samriddhi Account
• Employees Provident Fund (EPF)
• Gratuity
• National Pension Scheme (NPS)
• Sovereign Gold Bonds
• Debt Mutual Funds
• Balanced Funds
• Liquid Mutual Fund Schemes
• Ultra Short Term Mutual Fund Schemes
• Short-term Debt Mutual Fund Schemes
• Capital Protection-Oriented Funds