Wednesday, 10 June 2015

Why Non-Convertible Debentures beats Company Fixed deposit

An NCD might not ring a bell in the minds of most Indian investors but is quite popular in the western world. The concept of issuing NCD’s is relatively new to India, having been first issued by SBI in 2008-09 to retail investors. The bonds are listed on BSE/NSE retail debt terminal.

Advantages of investing in NCD’s v/s Bank/Corporate Deposits

  1. ·         NCD’s are in demat form- eliminates hassle of maintenance and safety of physical certificates.
  2. ·         NCD’s can be traded- The bonds issued under public offer are listed on the BSE/NSE. Absence of lock in period ensures the investor can exit before maturity.
  3. ·         No TDS Deduction- Since the bonds are in demat form and are listed there is no TDS.
  4. ·         Opportunity to earn profit- The bonds are listed and traded on the market, which gives an opportunity to trade and earn profits. The value of these bonds is inversely proportional to the interest rates in the economy.
  5. ·         Secure- Unlike Bank deposits which can generally be insured upto a certain limit, around Rs.1 lakh in most cases, NCD’s are secure in nature.
  6. ·         Pledging of NCD’s- Bonds can be pledged with banks/NBFC’s to avail a loan or overdraft facility.
  7. ·         Flexibility in tenure of maturity- The tenure of NCD’s could range from less than a year to 30 years. This acts as a buffer against reinvestment risk and also offers a steady source of income through interest.
  8. ·         Earn interest income till date of transaction- If an investor sells the bonds before their maturity he/she will get the accrued interest till the date of the sale.
  9. ·         Multiple interest payment options- An investor has the option to choose either cumulative payment or regular payment on interest.
  10. ·         No settlement risk- The transactions are confirmed off-market but are settled on the NSE/BSE platform, thus eliminating settlement risk.