Pros and cons of ncd investment non convertible debentures in india We have seen a lot of Non Convertible Debenture (NCD) issues hitting the market in recent times. Prominent among them are Shriram Transport Finance NCD, Shriram City NCD, Muthoot Finance NCD, etc. NCD’s are considered safe investment options as compared to stocks and can be traded in secondary market. Through this article, we will try to understand various features of NCD investment in India and its tax implication. What are NCD’s? Non Convertible debentures are certificates issued by companies to raise funds from public. It’s structured like a debt instrument with fixed tenure and interest payment at regular intervals. Invested amount is returned in the form of regular payments throughout the tenure or by onetime payment at the end. NCD’s cannot be converted into common shares (Non Convertible) and usually carry higher interest rates as compared to other debt instruments. Non Convertible Debentures investment is considered safe as compared to equity/company fixed deposit investment since claim of NCD investor is considered superior as compared to equity/fixed deposit investor. Advantages of NCD Investment Investment in NCD can be a smart decision as it scores above other debt investment options. A brief comparison between NCD and Bank Fixed deposit investment is presented below: Investment comparison (NCD Vs Bank FD) Investment in NCD Investment in Bank FDs Returns Interest rates offered are attractive compared to other fixed income instruments such as Bank Fixed Deposits Lower interest rate as compared to NCD’s Flexibility NCDs are listed on� NSE and BSE and c an be traded in the secondary market similar to trading in shares and bonds No listing on stock exchanges, hence cannot be traded Liquidity Fairly liquid, as most NCD’s are traded. There is no penalty for liquidation Low liquidity. Usually, penalty for premature withdrawal Interest rate sensitivity With Interest rates going down, bond prices goes up and vice versa Fixed interest rates Key Risks Involved in NCD Investing Although NCD investment is considered a safe investment, it does have some element of risk associated with it. Key risk factors which you should keep in mind while investing in NCD are: 1. Interest Rate Sensitivity – Changing interest rates affect the price of NCD’s. Price sensitivity bears an inverse relationship with the direction of interest rate movement. If the interest rates go up, price of the NCD falls and vice versa. As NCD’s are traded in secondary market, prices adjust quickly to changing interest rate scenario and adjustment in negative direction means loss to the investor. 2. Low Participation – NCD’s trading market lacks broad participation, leading to illiquidity at times. Situation gets worse if parent companies’ performance is not good. 3. Rating Errors and Downgrades – These issues are rated by rating agencies which are prone to errors. If they fail to rate the issue correctly, there are chances of rating downgrades in future. Rating downgrades can be detrimental to investors return. What is the tax treatment of these NCDs? Interest income from NCD investment is taxed as per the tax slab of investor. If you trade in NCD’s in the secondary market, then long term capital gains (holding period above one year) will be taxed at the rate of 10% without indexation or 20% with indexation. Short term capital gains (holding period less than a year) are taxed as per the normal tax slab of investor. Tax rates keep on changing depending on government policies; hence, investors are advised to consult the income tax website (incometaxindia.gov.in) for current tax rates. investmentyogi/pros-and-cons-of-ncd-investment-non-convertible-debentures-in-india/
Posted on: Thu, 05 Jun 2014 08:50:20 +0000
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