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Business News/ Money / Personal-finance/  When you should avoid NCDs
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When you should avoid NCDs

The NCD is a promise that the company will pay back the money at a promised interest rate. The rules have been eased to allow access for public issues for retail investors. Here's how it work

The interest rate of NCDs that hit the market this year was better than that of bank FDs. Photo: MintPremium
The interest rate of NCDs that hit the market this year was better than that of bank FDs. Photo: Mint

Non-convertible debentures (NCDs) are fixed income instruments where you are promised a certain interest for a tenure. Companies issue NCDs when they want to raise money for various needs such as expansion. The NCD is a promise that the company will pay back the money at a promised interest rate. It is closed-ended, which means it is available for subscription only for a particular period. In 2018, there was a surge in the number of NCDs from financial companies for retail investors due to the regulatory changes that Securities Exchange Board of India (Sebi) introduced. The rules have been eased to allow access for public issues for retail investors.

How it works?

Usually, there are 3-year, 5-year and 10-year tenures — and interest rate can range between 8.66% and 9.75%, depending on the company, tenure of investment and payout options. The interest rate of NCDs that hit the market this year was better than that of bank FDs. You can choose the payouts— monthly, quarterly, annually or cumulative. If you are looking for monthly income, monthly payout option could work. You should decide on three parameters— safety, liquidity and returns. Check for the credit rating and the fundamentals of the company. It could be a good practice to look for dual credit ratings from reputed agencies.

Avoid if in highest tax bracket

If you are in the highest tax bracket, avoid investing in NCDs. All NCDs are taxable at your income tax slab rate. If you fall under the 30% tax bracket, the interest you earn from the NCD will be taxed at 30%. It can work for those who don’t fall in the income tax slab or are in a low income tax slab. However, remember you get locked-in a product for a longer duration. If you are comfortable with parking a portion of your money in illiquid asset only then consider NCD after factoring in tax and safety. You can expect more NCDs to enter the market in 2019 too.

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Published: 15 Dec 2018, 11:25 AM IST
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