Fixed income investments offer a fixed return throughout the investment period. A simple example is a bank Fixed Deposit. The interest doesn’t change throughout the tenure.
There are other investments which offer better returns and less risk exposure than a stock market. Non-Convertible Debenture (NCD) are a category of investments providing fixed returns.
What are NCD Fixed Income Investment ?
Non-Convertible Debenture are issued by corporates to raise money for their business. They pay interest for the money collected from public.
What are coupon rate ?
The interest offered on issued NCD is called coupon rate. Each NCD when launched in primary market has a face value as well.
Is it similar to Bonds ?
Yes, similar but bonds are usually referred when a government raises money for its needs and provides interest on same.
Why company raises money through NCD ?
For a company in need to money they might not have enough working capital, wouldn’t have got business loans from banks or investors. NCD is a convenient way to raise money from public.
Is my invested money safe ?
Yes, company gets a credit rating from authorised agencies before the launch of NCD. These ratings define the financial worthiness of business and risk associated. The business raising money also provides security for the issued NCDs. In case of a default the govt shall pledge the secured assets and return back money to investors.
There are unsecured NCDs as well, which has a higher risk. But for an investor the risk is compensated by providing a higher coupon interest.
Can I exit NCD investments ?
Yes, The NCDs can be sold in secondary market, similar to stocks through stock brokers.
The NCDs coupon rate is fixed till the maturity period. However price of NCD may go up or down than the face value in which it is launched depending upon the demand.
Say a NCD with coupon rate 9.5% and 1000/- rupees face value might trade at 1050/- (May be because NCD interest is much better in a bearish market and demand goes up and hence the price of NCD also moves up). You would have benefitted from 9.5% per annum till the period for which you held and also the additional price increase of 50/- rupees.
How much I get interest if I buy a NCD from secondary market ?
The coupon rate will still be same as when launched. But the price might go up or below face value based on demand. Say a 1000/- face value is now purchased at 1050/- price. The coupon rate applies to face value only. So to know the actual return you should know the yield i.e return on the price at which you purchased, this will be less than coupon rate if you purchased at a higher price. The decision you make is based on the yield percentage, if you are satisfied with returns then you go for the purchase.
Also on maturity you only get the face value of NCD not the price at which you bought.
What happens if I hold till maturity ?
Say a NCD with coupon rate 9.5% and 1000/- rupees face value might trade at 950/- (May be because this time Market interest is much better in a bullish market and demand goes down and hence the price of NCD also cones down). You will still benefit from 9.5% per annum till the period for which you hold and no need to worry about the price change. Because on maturity you will get the face value back.
Who offers NCDs, how can I do NCD Investment ?
Along with many other companies, Edelweiss one of the financial institution and stock broker in India issues NCDs regularly.
Please contact us for more details, we will be able to invest your money in safe manner.