Investors’ Demand for NCDs - Trading Goes Up in the Secondary Market.

Non-convertible debentures have started receiving more popularity among investors as the interest rates of reputed banks and company fixed deposits have gone down. Non-convertible debentures refer to those debentures issued by companies which cannot be converted into equity shares.They normally provide higher interest rates.

Currently, the investors’ expectation on NCDs has gone up given the fall in interest rates provided by the leading banks and companies. Besides, it is expected that the Reserve Bank of India (RBI) will further cut interest rates. Hence, the investors have moved to NCDs, and they expect the NCDs to fetch at least 11-13% of interest.

The top rated company fixed deposits provided by SBI and Mahindra Finance are offering very low rates of interest in comparison to the NCDs provided by Shriram Transport Finance and India Infoline Housing Finance Limited ( IIHFL). Both Shriram Transport Finance and  IIHFL are expected to provide returns like 11.03% and 11.59% respectively in the coming years. SBI's fixed deposit provides a maximum interest rate of 8.5% whereas Mahindra Finance Fixed Deposit schemes fetch a maximum of 9.75%. Also, it is expected that interest will fall further by 50-75 basis in this year. Hence, the investors prefer to go for investments in NCDs as they ensure long term capital gains after holding them for a period of one year, in addition to high interest.  No tax is deducted on interest payment in NCDs, and they offer more favorable taxation for the investors, which is another reason why the investors prefer to invest in NCDs.

Things to consider before buying NCDs:

However, the investors need to know certain facts before investing in NCDs, and it is slightly difficult for the retail investors to invest in NCDs, although they are traded in secondary markets.  First, the investors should have a clear idea of how much profit they will have before investing in NCDs. Also, they need to have a demat account for purchasing NCDs. Normally, when an investor buys an NCD,  the face value, the coupon rate  and tenure of the investment are communicated to the investor in writing so that the investor has a better idea of how much he/she will  earn from the NCD. It is important for the investors to do their own calculations before investing in NCDs. They should clearly know of the frequency of interest rate payment and the tenure of its maturity.  

There is also an option of buying NCDs in small quantities. When an investor tries to buy huge quantities of NCDs in one go,  for example  NCDs  costing more than Rs 5 lakh, then the NCDs price may go up affecting the returns caused by the hike in  NCDs’ price.  

Also, an investor should conduct a basic market research to find out the ratings and financials of a particular company before investing in its NCDs. It is always good to choose the best-rated companies like Shriram Transport Finance and India Infoline Housing Finance Limited to purchase your NCDs so that your profit is ensured.