How To Buy NCD (Non-Convertible Debentures)?
(NCDs) are debt instruments issued by companies to raise funds. This guide explains how to buy NCDs, including the benefits and risks of investing in them!
Investors in the Indian stock market involves a risk of volatility and lower liquidity, which can lead to losses in some asset classes. Hence, experienced investors diversify their investments in various asset classes to ensure they get some return on their investments if other asset classes fall in value.
You can invest in equities based on the risk and reward principle but look towards debt instruments for safer investments and earning a regular income, irrespective of the market scenario. One such ideal debt instrument to earn a steady income on the investment amount is a Non-Convertible Debenture.
What Are Non-Convertible Debentures?
Non-convertible debentures are types of debentures that allow investors to invest a certain amount of money to buy the debt instruments and earn regular interest payments on the invested amount. Unlike convertible debentures, which the investors can convert to shares after a particular time, you cannot convert non-convertible debentures into shares.
When you buy NCDs online, you can sell the instrument or earn interest payments based on the interest rate set by the NCD issuer. Individuals, primary dealers, banking companies, corporate bodies, and unincorporated bodies can make NCD investments In India.
How To Buy NCD Online?
The Securities and Exchange Board of India, the regulatory body that manages the Indian security market, allows only creditworthy companies to issue non-convertible debentures. The creditworthiness of the NCD issuing company is based on its cash flow and how well it can provide regular interest payments to the investors without default.
Once SEBI reviews the prospectus of the NCD issuing company, it gives the go-ahead to the company to issue the non-convertible debentures. Later, the company issues the NCDs through a public issue that remains open for a specific period, similar to IPOs.
The process of how to buy non-convertible debentures requires the investors to login into their online stock broking account and place a buy order to buy NCD online. Before you buy NCD online, you should ensure that you have an active Demat and trading account with a registered stockbroker and sufficient funds equal to the amount you want to invest in the NCDs.
Factors To Consider Before You Buy NCD OnlineNow that you know how to buy NCD online, here are some things you should consider before you buy NCD online:
• Various credit rating agencies provide a credit rating to NCDs at the time of their public issue. The issuer's credit rating should be AA and above to ensure that the issuer would not default on interest payments.
• You should thoroughly analyse the fundamentals of the NCD missing company to determine the cash flow of the company. A positive cash flow with adequate revenue showcases less possibility for default.
• One of the most important things you should consider is the interest coverage ratio which shows the number of times the company’s earnings covered the interest payments. It is ideal to buy NCD online that has a higher ICR.
ConclusionNon-convertible debentures have become an ideal investment instrument for investors who want to invest in a debt instrument with a lower risk exposure to earn a regular income. However, before you buy NCD online, you must open a Demat and trading account. IIFL offers comprehensive Demat and trading accounts that are free of cost with a trading platform equipped with unique and user-friendly features. Visit IIFL to open a free Demat and trading account today and invest in NCDs.
Q.1: Is it compulsory to open a Demat and trading account to buy NCDs?
Ans: Yes, SEBI has made it mandatory to open a Demat and trading account with a registered stockbroker to buy NCDs online.
Q.2: What is a Put option in NCDs?
Ans: The put option in NCD allows the investors to sell the NCD back to the issuer at any time before maturity to receive the initial principal amount.