You can invest in the bonds during their public offering by filling out a physical form and providing the relevant information. You can also use your Demat Account to make an investment online.
How do I make an NCD investment?
Non-convertible debentures are another investment option that appeals to investors in this low-interest rate climate (NCDs). NCDs are issued by corporations to generate cash from the general public and provide a set return that is often higher than that offered by bank fixed deposits. NCDs are a debt investment that is comparable to a bond in that the investor’s money is not invested in the stock market.
While the interest rate is high, as is the risk, there are a few other factors to consider before investing in them.
Tenure: The duration of an NCD investment might range from a few months to ten years. The rate of interest offered on shorter-term debentures is often lower than that offered on longer-term debentures. To manage risk with NCDs, one can either stagger investments across different tenures or keep to shorter durations.
Interest Payouts: NCDs may give interest payouts on a monthly, quarterly, half-yearly, annual, or cumulative basis. Choose according to one’s regular income demands, but keep taxation in mind when making a decision. Interest income is added to one’s earnings and is fully taxable according to one’s income bracket. TDS will not be deducted if the debentures are held in demat form; otherwise, if the yearly interest reaches Rs 5,000 in any financial year, TDS would be deducted.
Liquidity: Liquidity in NCDs is generally limited and comes at a cost. Despite the fact that NCDs are traded on stock exchanges, investors may not get the best price by selling them there due to poor liquidity. Only apply for NCDs if you intend to hold them till maturity.
Safety: When it comes to the safety of NCD investments, the ratings are crucial in determining the riskiness. The issuer’s position in servicing its financial commitments, such as paying interest when due and paying the maturity proceeds on schedule, is reflected in the ratings of NCDs issued. NCDs with good ratings may have low or competitive interest rates, whilst those with lower ratings may have higher interest rates. Investors should keep in mind that ratings essentially reflect the financial position at the time the rating process is undertaken; as a result, investors should keep in mind that the financial position may change over time.
Some NCDs may be secured, while others may be unsecure. In the case of a secured NCD, the claims of the Secured NCD Holders will take precedence over the claims of any unsecured creditors, as the former will be considered the company’s secured obligations. The unsecured NCDs are subordinated to all other creditors’ claims, as they are not secured by any charge on the company’s assets and are not secured by any charge on the company’s assets. As a result, secured NCDs may have a lower interest rate than unsecured NCDs in the same issue.
You can apply directly on the issuer’s website by making an online payment, if such option is made available to investors. You can also apply online if you already have a demat account with a brokerage like ICICI Direct or HDFC Securities. Furthermore, NCD issuers have centers where designated intermediaries such as brokers and registrar agents can accept Application Forms in real form. You can also submit ASBA Forms (including ASBA Forms under UPI in the case of UPI Investors) to a Registered Broker to apply for NCDs. Once NCDs are listed on stock exchanges, they can be purchased on the secondary market.
If the NCDs offer interest rates that are significantly higher than the market or similar competitive NCDs, they may be deemed to be riskier. Rather than opting for high-interest-rate NCDs, go with well-established and reputable businesses. Finally, before investing in NCDs, make sure to read the risk considerations listed in the prospectus. Knowing the risk ahead of time will assist you in making more informed financial decisions.
Is it wise to invest in NCDs?
These NCDs may be purchased by investors with a medium risk profile who are looking for alternatives to bank and corporate FDs. These NCDs, on the other hand, are subject to credit and interest rate risks. As a result, NCDs with a stronger rating, a higher yield-to-maturity (YTM), and significant liquidity on the markets should be considered.
How can I make an online NCD investment?
Important Considerations When Investing in an NCD IPO Online
- Demat account – The candidate should have an active Demat account in addition to a bank account.
Are NCDs risk-free?
Despite the fact that NCDs are generally regarded as safe fixed-income securities, recent defaults have made investors wary. NCDs can be secured or unsecured by the assets of the issuer company. Certain issuers with credit ratings below investment grade have previously issued both a secured and an unsecured NCD with differing credit ratings using the same offer instrument. Even while unsecured NCDs have high interest rates, they come with a considerable risk.
Before investing in any NCD, it’s important to consider the issuer’s credit rating. Reliance Capital Ltd’s defaults have alarmed investors, with Rs 16,260 crore worth of NCDs stranded with the business after the RBI recently superseded it. Secured NCDs account for Rs 15,855 crore, while unsecured NCDs account for Rs 1,405 crore. According to the draft resolution plan announced in September, DHFL owes Rs 41,431 crore to NCD holders (including individual investors, mutual funds, and others). When IL&FS went bankrupt three years ago, it had Rs 25,000 crore in NCDs stranded in the business, which had yet to finish its resolution plan. Banks can rely on personal guarantees from promoters in the event of bankruptcy, but NCD holders do not.
Is NCD a tax-free investment?
What is the tax on NCDs that include a cumulative payment option and have been held for more than 36 months? What tax should be applied to listed vs. non-listed NCDs?
NCD interest is taxed at applicable slab rates under the heading ‘other sources,’ whether paid regularly or cumulatively. If NCDs are held in dematerialized form and are listed on a stock exchange, interest is not subject to tax deduction at source. Profits from the sale or redemption of NCDs must be reported to the IRS as “Capital Gains.” Gains on listed NCDs are classed as long term if held for more than one year, otherwise they are classified as short term. If the debentures are held for longer than 36 months, gains from the sale of unlisted NCDs are long term. LTCG is taxed at a fixed rate of 20% with indexation, whereas STCG is taxed at applicable slab rates. However, for listed NCDs, LTCG can be calculated at 10% without indexation or 20% with indexation, depending on your preference.
What are the dangers of NCD?
In order to raise funds from the public, cash-strapped businesses frequently turn to NCDs with higher interest rates. Secured NCDs are backed by assets, which are liquidated to repay investors if the company is unable to meet its commitments. Secured debenture issuers pay lower coupons than non-secured debenture issuers. Investors in unsecured NCDs will simply lose their money if the company fails or goes bankrupt.
NCDs are not liquid, therefore it’s difficult to sell them even on the secondary market, where activity is still quite weak. As long as they are invested, investors must keep an eye on the ratings. For example, in less than two months, IL&FS was lowered to a D rating from the highest AAA. Those with AAA ratings are typically the safest, while those with AA ratings should be avoided.
PCHFL, a wholly-owned subsidiary of Piramal Enterprise, is offering secured NCDs with a Rs 200 crore issue size and the option to retain up to Rs 800 crore in oversubscription. The issue had four maturities: 26, 36, 60, and 120 months, with a coupon ranging from 8.35 to 9%. (see chart). Each NCD has a face value of Rs 1,000 and a minimum investment of Rs 10,000. (10 NCDs). In the 26-month term, there are two interest payment options: annual and cumulative.
The company has set aside up to 40% of the issuance for retail investors, who will receive their shares on a first-come, first-served basis. The first tranche of the offer will end on July 23, 2021.
The IIFL Home Loan Bonds are unsecured subordinate redeemable NCDs with a fixed rate of 10% per year for yearly interest payout and 9.6 percent per month for monthly interest payout. The term of office is set at 87 months. NCDs have a face value of Rs 1,000 and a minimum application amount of Rs 10,000. (10 NCDs). The size of the issue is ‘1,000 crores’ (base issue of Rs 100 crore with an option to retain over subscription up to Rs 900 crore). The Trance 1 issue’s subscription period will end on July 28, 2021.
Because the holdings will be in demat form, there will be no tax deduction at source. NCD interest is taxed at the highest marginal rate. Short-term capital gains at a marginal rate will also apply if they are sold within a year. If you sell after a year, you’ll have to pay long-term capital gains of 10% without indexation, plus a 4% education and further education cess.
NCDs have a larger credit and liquidity risk than bank deposits, so investors should keep that in mind. Experts advise choosing secured NCDs to greatly lower the danger of a complete default. In addition, the allocation should not exceed 10% of one’s fixed income portfolio.
Are debentures a high-risk investment?
Debentures are less hazardous than investing in the same company’s common stock or preferred stock because they are debt securities. In the event of bankruptcy, holders of debtentures would be regarded more senior and would take precedence over other types of investments.
These debts, however, are fundamentally riskier than secured obligations because they are not backed by any collateral. As a result, interest rates on these bonds may be higher than on other identical collateral-backed bonds from the same issuer.
In fact, a U.S. Treasury bond and a U.S. Treasury bill are both debentures in the strictest sense. Despite the fact that they are not backed by anything, they are considered risk-free investments.
Why do businesses increase their NCD?
Agencies like Fitch Ratings, CRISIL, ICRA, and CARE rate every company that wants to raise money through an NCD. The corporation is rated by these agencies based on its capacity to pay its debts on time. As a result, a lower credit rating indicates a bigger credit risk.
Is Muthoot Finance NCD a safe investment?
On January 5, Muthoot Fincorp Limited launched its 12th public issuance of Secured Redeemable Non-Convertible Debentures (NCDs) to raise Rs. 200 crore, with an option to retain up to Rs. 200 crore in over-subscription, for a total of Rs. 400 crore. The monies raised will be used largely for onward lending, financing, and the repayment/prepayment of interest and principal on the company’s current borrowings. The NCDs will have a face value of $1,000 each and a minimum ticket size of $10,000. Secured NCDs will be available in ten tenures: 27 months, 38 months, 72 months, and 96 months, with effective yields ranging from 8.30 to 9.37 percent. Crisil Limited has given the issue a “CRISIL A+/Stable” rating and the issue will conclude on January 28 with the option to close early or extend as per SEBI regulations. During April 2021 to December 2021, the company raised cash totaling 665.11 crore through NCD public issuance, 500 crore through Market Linked NCDs (MLD), and 75 crore through private placements. Muthoot Fincorp Limited’s Managing Director, Thomas John Muthoot, said the company has seen an increase in demand for gold and MSME loans. As a result, the company has chosen to issue an NCD to help meet its growing working capital needs.