Non-convertible debentures (NCDs) are fast becoming a popular investment option for investors looking for long-term horizon. Compared with bank FDs, NCDs tend to offer better returns and much more. However, there are 3 vital things that you need to watch out before making your decision to invest your hard-earned money in NCDs. They are as follows:
The extent to which your capital is safe
The major premise or goal for investing in debt instruments is safety of your capital. Therefore, the first thing that you must analyse very carefully before investing in NCDs is the safety level of your capital. Please note that many private companies that issue NCDs also tend to default on repayment of your principal amount invested. That’s the last thing you want as an investor. Therefore, always look at the credit rating assigned to the NCD by a prominent ratings agency such as Crisil, ICRA, or Care. This will give you a fair idea on how safe your capital is with that company, if you invest in their NCD. Moreover, credit rating increases your confidence levels to take a well-informed investment decision. Please remember if the NCD is assigned a higher credit rating by top agencies mentioned above, the returns you will derive from such investment will be higher and more secure compared with NCDs that possess a lower credit rating. Hence, always watch out for the credit rating assigned to the NCD before making your NCD investment.
Ascertain the asset strength of the company issuing NCDs
Investing in NCDs is like lending money to the company issuing the NCDs. Thus, please note that you will have the first right over the NCD issuing company’s assets in case of liquidation since you are a lender. However, in case the issuing company’s assets are not sufficient to cover your invested amount, then you are risking losing your whole capital. Hence, analyse the assets and the financials of the issuing company well before taking your investment decision. In fact, it will be a good thing to check the company’s book value.
Find out the liquidity levels of your investment
Please remember one of the major factors to consider before investing in NCDs is liquidity. NCDs can be traded in the secondary debt market. Thus, you don’t have any obligation to hold them until the maturity date. Hence, checking whether the NCDs you selected are traded regularly on the BSE and NSE becomes imperative. Please note that many NCD issuing companies’ debentures are not traded on stock exchanges for days together. That is definitely not the investment option you are looking for in terms of investing in NCDs.
Given the risks associated with capital and liquidity coupled with the financial analysis required, you are best advised to approach professional financial experts. They will help you with all the vital information required about the company, provide you with research services, key company fundamentals, and seamless trading platform. Thus, they will help you largely in taking a well-informed investment decision for parking your hard-earned money in NCDs.
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