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| February 24, 2023

How to Buy NCDs (Non-Convertible Debentures)?

Companies raise capital by either borrowing from bank and other lenders or by issuing bonds to the public. Organizations need capital funding for their short-term and long-term business requirements. They procure financing either through loan from lenders or by issuing bonds and debentures to the public. The issuer of these bonds and debentures pays interest to the persons making the debenture investment. In India, debenture investments are generally done through private companies that issue them. Debentures are also a kind of bond that is not attached to collateral. Put simply, debentures are unsecured bonds. Since debentures are riskier than bonds, the interest rate on debentures is generally higher than bonds. Treasury Bills, Treasury Bonds, and low-rated (less than AA+) Corporate Bonds are examples of debentures. NCDs (Non-Convertible Debentures) are a type of debenture that cannot be converted into shares or equity. An investment in NCDs should be based on your risk profile, risk appetite, and financial goals.

Types of Non-Convertible Debentures

There are two types of NCDs:

Secured NCDs: Secured NCDs are those NCD investments that are backed by the issuer/borrower company's assets. If the borrower defaults on investor payments, the investors can claim payment through the borrower’s assets.
Unsecured NCDs: In India, NCD investments that are not backed by the issuer company's assets are called unsecured NCDs. The investors cannot claim payment as the NCDs are not secured by collateral and hence are riskier than CDs.

Muthoot Finance is a trusted name when it comes to NCDs. You can invest in Muthoot Finance’s non-convertible debentures according to your risk profile, risk appetite, and financial goals.

Things to Know Before Investing in NCDs

While making any kind of investment, you should look at the risk, returns, and liquidity of the instrument among other things. Apart from that, you should also look at your risk appetite, financial goals, and investment horizon. The same goes for NCD investments too. Before you decide on the best NCD to invest in, you should be aware of the following aspects:

	NCDs
Security	They are unsecured and not backed by the assets of the issuer as security.
Interest Rate	The NCD interest rates are higher than bonds.
Interest Type	They usually have a fixed interest rate.
Interest Payments	The interest is paid periodically based on the issuer’s performance.
Maturity	NCDs cannot be withdrawn before maturity. Since NCDs are listed on the share market, they can be sold in the secondary market.
Risk Factor	NCD schemes are high-risk, high-return investments.
Conversions	NCDs cannot be converted to stocks of the company.
Tenure	Debentures like NCDs are generally issued for short term capital requirement; hence have a shorter tenure than bonds.
Issuing Body	Private companies generally issue NCD Schemes.
Priority	A debenture holder is the first one to be paid before equity shareholders.

How to Buy an NCD?

Upcoming non-convertible debentures are initially issued by the company in the exchange and later traded in the secondary market. So, you can either choose to subscribe when a company announces an upcoming non-convertible debentures or buy later in the secondary market when it is trading. You can buy NCDs both online and offline.

How to Buy an NCD Online?

Buying an NCD Directly from the Issuer: You may directly visit the issuer’s website and can apply from there by making an online payment.
Buying NCD through a Broker: If you already have a Demat account with any brokerage firm, you can buy the NCD when it starts trading in the secondary market.

How to Buy an NCD Offline?

Via Designated NCD Centers: Some of the best NCD issuers have designated centers where intermediaries such as brokers, and registrar agents are allowed to accept the Application Forms in physical form. For the offline mode, you need to submit an ASBA Form. ASBA is “Application Supported by Blocked Amount”. It is an application that can be used by an investor subscribing to IPO/FPO/Rights shares and acts as an authorization to block the application money in the bank account.

Tax Implications of NCD Investments

It is important you understand the tax calculation on NCDs. Interest earned through NCDs, if held until maturity, is clubbed with your income and taxed at your marginal income tax rate. You can easily calculate the interest via an NCD Interest Calculator. If you sell your NCD scheme on the stock exchange before a year then you will have to pay short-term capital gains at income-tax rates applicable to you. If the debenture is encashed after one year but before its maturity, you will have to pay long-term capital gains tax on the effective return at applicable rates.