How Safe Are Non-Convertible Debentures?

How Safe Are Non-Convertible Debentures?

People invest their money to grow it and increase their wealth. Non-convertible debentures (NCDs) are one of the investment types where you lend money to a company, and in return, they pay you interest at a fixed rate. Unlike convertible debentures, NCDs cannot be changed into shares of the company. Many people choose NCDs as they offer higher returns than regular savings options, but how safe are they? Let’s explore the meaning of non-convertible debentures, how safe they are, and who should consider investing in them.

What Are Non-Convertible Debentures (NCDs)?

Non-convertible debentures (NCDs) are loans you give to a company for a specific time period, usually between one to five years. In return, the company promises to pay you interest regularly and give back your full amount when the NCD matures. As these are “non-convertible,” it means they cannot be converted into company shares.

NCDs are of two types:

• Secured NCDs – These NCDs are backed by the company’s assets, so if the company is unable to pay you back, they sell these assets to cover the loss.
• Unsecured NCDs – These are risky as they are not backed by anything. So, if the company fails to pay, you may lose your money.

Also Read : What is Non Convertible Debentures

How Safe Are NCDs?

The safety of NCDs depends on the company issuing them. If the company is financially strong and has good management, NCDs can be considered safe, especially secured NCDs. Secured NCDs, as mentioned earlier, are backed by assets. On the other hand, unsecured NCDs are riskier as there is no asset backing in case the company defaults on its payments.

Credit Ratings and Their Importance

Before a company issues an NCD, it gets a credit rating from rating agencies like CRISIL or ICRA. This rating helps investors understand how likely the company is to pay back the money.

Credit Rating	What It Means	Safety Level
AAA	Very Strong	Very Safe
AA	Strong	Safe
A	Moderate	Fairly Safe
BBB	Low	Risky
BB or Below	Weak	Very Risky

So, when you invest in an NCD, do check out the ratings.

Risks Associated with NCDs

Like any investment, NCDs also come with risks. Here are a few things you should keep in mind:

• There is a credit risk, which means the company may not be able to pay back your money.
• If interest rates go up in the market, your NCD may not seem as attractive, and its market value could drop.
• There is also a liquidity risk. If you need to sell the NCD before its maturity, there may not be many buyers, and this would make it difficult to sell.
• The company may fail to repay your money if it runs into financial trouble.

Also Read : How Safe is it to Invest Money in P2P Lending

Benefits of Investing in NCDs

Despite all the risks mentioned above, you can choose to invest in NCDs as they offer several benefits:

• NCDs usually pay more interest compared to savings accounts or fixed deposits.
• Here, you get interest at fixed intervals, which can be useful if you need a steady income.
• Investing in secured NCDs provides extra safety as they are backed by the company’s assets.
• NCDs can also variety to your investment portfolio and reduce the overall risk.
• Some NCDs are listed on stock exchanges, so you can sell them if you need to before maturity.

Who Should Consider Investing in NCDs?

NCDs be a good option for:

• People looking for fixed returns
• Retirees as NCDs provide regular interest payments
• Investors who are looking for higher returns
• Conservative investors who are cautious but want slightly higher returns

Conclusion

If you are looking for higher returns with fixed income, then you can certainly go for Non-Convertible Debentures (NCDs). Now, if you are sure about investing in NCDs, download the 13Karat app to invest in NCDs with just ₹1 lakh and enjoy a 16.1% annual return.

13Karat provides you the opportunity to earn more!

Grab it now and grow your investments.