Non-Convertible Debentures (NCDs) are a popular fixed-income investment option for investors seeking regular income and potentially higher returns than traditional bank fixed deposits. Having said that, NCD returns are risk-dependent and not guaranteed. Companies, including banks and non-banking financial companies (NBFCs), issue NCDs to raise funds from the public, making them an accessible debt investment avenue in India.
For investors building a diversified fixed-income portfolio, understanding how to invest in non-convertible debentures is essential. NCD investment options are available across credit ratings, tenures, and interest payout structures, allowing investors to align choices with their risk appetite and income needs.
This article explains how non-convertible debentures work, expected NCD returns, associated risks, and the step-by-step process for investing in NCDs in India.
What Are Non-Convertible Debentures (NCDs)?
Non-Convertible Debentures are debt instruments issued by companies to borrow money from investors for a fixed period. In return, investors receive interest at a predetermined rate and the principal amount at maturity.
The “Non-Convertible” Distinction
The key feature of an NCD investment is that it is non-convertible. Unlike convertible debentures, which can later be converted into equity shares of the issuing company, non-convertible debentures cannot be converted into shares.
This means investors act only as creditors. Returns are limited to fixed interest payments and principal repayment, without any participation in equity price appreciation or ownership benefits.
Key Points to Know Before Investing in NCDs
Before you decide to invest, here are a few important points to understand about Non-Convertible Debentures (NCDs):
Fixed Maturity: NCDs are issued for a fixed period, typically 2 to 10 years. The principal is repaid at maturity.
Fixed Interest: NCDs offer a fixed interest rate. Interest payouts may be monthly, quarterly, annually, or cumulative, depending on the issue structure.
Credit Rating: All NCDs offered to the public must be rated by a recognised credit rating agency such as CRISIL, ICRA, or CARE. The credit rating indicates the issuer’s ability to repay its debt and the risk of default. Higher-rated NCDs (e.g., AAA-rated) carry a lower default risk.
Safety: The safety of NCDs depends on whether they are secured or unsecured. Secured NCDs are backed by specific assets of the issuing company. If the issuer fails to repay, investors have a claim on these assets. Unsecured NCDs are not backed by assets and rely solely on the issuer’s financial strength and creditworthiness.
How to Invest in Non-Convertible Debentures
An NCD can be purchased in either the primary market (new issues) or the secondary market (existing issues).
1. Primary Market: The Initial Public Offer (IPO) Route
A public issue is similar to an initial public offering. In this case, a company raises money from the public by issuing Non-Convertible Debentures (NCDs).
Demat Requirement: To invest in an NCD public issue, you must have a Demat account. This is required because NCDs are issued and held only in electronic (demat) form. A trading account may be needed if you apply through a broker.
How to Apply: You can apply through the ASBA (Application Supported by Blocked Amount) facility using your bank’s online platform or a broker’s platform. Under ASBA, the application amount is blocked in your bank account and remains blocked until the allotment is completed. The amount is debited only if NCDs are allotted to you.
Tranches of Issues: NCD public issues are often offered in different tranches. These tranches allow investors to choose the tenure (such as 3, 5, or 10 years) and the interest payout option (monthly, annually, or cumulative).
2. The Secondary Market: Buying and Selling on Exchanges
Once the NCDs are sold in the main market, they are listed on the NSE and BSE stock markets.
Liquidity: Investors can buy or sell existing NCDs on the secondary market before maturity. This is crucial for tracking your NCD investment if you unexpectedly need money.
Price Changes: The price of an NCD in the secondary market can fluctuate. If interest rates rise, the price of the existing NCD will fall because its fixed coupon becomes less appealing. When interest rates decrease, NCD prices generally rise. These price changes determine the NCD’s market yield.
Broker Platform: Similar to shares, investors can place buy or sell orders for NCDs through their broker’s trading platform.
Understanding the NCD Risks
NCDs (Non-Convertible Debentures) are generally considered a safer fixed-income investment than equities. However, they are not completely risk-free. Investors should mainly be aware of the following two risks:
1. Credit Risk (Risk of Default)
This is the risk that the issuer may fail to pay interest or repay the principal on time.
Mitigation:
To reduce this risk, investors should regularly check the issuer's credit rating. Investing only in NCDs with AAA or AA ratings significantly lowers the chance of default. [KE1] [DE2] However, no investment is entirely risk-free, and even highly rated NCDs can be affected by unexpected financial stress or adverse business conditions.
Companies such as banks and well-established financial institutions with strong balance sheets and a good track record are generally considered less likely to default.
2. Interest Rate Risk
When market interest rates rise, the market value of existing NCDs usually falls.
Mitigation:
This risk is higher in NCDs with longer maturity periods. Investors concerned about interest-rate changes should prefer shorter-term NCDs (2–3 years). This reduces the potential loss if the NCD needs to be sold before maturity.
Conclusion
Investing in non-convertible debentures (NCDs) can help stabilise a portfolio and provide a steady source of income. Since NCDs offer fixed interest rates and predefined maturity periods, they are a suitable option for investors seeking low-risk fixed-income investments to help manage inflation.
Before investing in NCDs, it is important to conduct thorough research, including checking the issuer’s credit rating. Investors should also choose a tenure and an interest payout frequency that align with their financial goals. Overall, NCDs are a simple and reliable investment option for Indian investors seeking regular income.
For investors seeking predictable returns with lower volatility, fixed-income options such as Shriram Fixed Deposits can complement NCD investments by offering competitive rates, flexible tenures, and added stability.
FAQs
1.What are non-convertible debentures (NCDs)?
Non-Convertible Debentures (NCDs) are debt instruments issued by companies to raise funds. They offer a fixed interest rate (called a coupon) for a specific period. These instruments cannot be converted into equity shares of the issuing company.
2.How to invest in NCDs?
You can invest in NCDs through the primary market by applying during a public issue using the ASBA facility via your bank or stockbroker, or through the secondary market by trading listed NCDs on stock exchanges after issuance.
3.What are the benefits of investing in NCDs?
Investing in NCDs provides steady, predictable income, usually higher than that from bank fixed deposits. Since they are listed on stock exchanges, they offer liquidity, and investors can choose options based on the issuer’s credit rating and risk level.
4.How are interest payments on NCDs made?
Interest payments on NCDs are made in accordance with the terms set out in the offer document. They may be paid monthly, quarterly, annually, or as a lump sum at maturity.
5.What is the lock-in period for NCDs?
NCDs have no mandatory lock-in. Investors can sell listed NCDs anytime on NSE/BSE. However, unlisted NCDs (private placement) typically have 1-3 year lock-ins."