Corporate firms prefer to borrow for accessing funds. Bonds and Non-Convertible Debentures (NCDs) are 2 different routes of borrowing to raise funds. Government and large corporations prefer bonds, while large public companies make the use of debentures for raising money from the market. These fixed income instruments produce lesser returns in comparison to stocks, but they give a touch of stability to your portfolio.
Non-convertible Debenture (NCD) means a financial instrument, in the form of a public issue. For several purposes, companies prefer to use them to raise capital. NCDs are known as debt instruments. These instruments carry fixed tenure and individuals investing in NCDs receive regular interest at a certain rate. Pay-outs can be decided by the investor and these can be monthly, quarterly, or annually. At the time of maturity, principal amount is paid to the investor (debenture holder). There are debentures which can be converted into shares after a certain duration. However, this is not possible if the instruments are NCDs. This is the reason they are non-convertible.
Bonds are fixed-income securities. Investor lends money to some company or a government for a specified time duration. In return, that investor will get interest payments regularly. Upon the completion of the tenure or when the bond reaches maturity, the bond issuer (borrower) returns the money to the investor.
NCDs are suitable when an investor wants stable and consistent return with the minimum risk. Investors in NCDs can get consistent periodic return instead of getting the lump sum return. This investment is suitable for investors having lower risk appetite. Since it advisable to diversify your portfolio, investment in NCDs takes care of this principle. The addition of debt instrument gives a sense of diversification to the portfolio. Equities carry the risk of loss of capital. Therefore, some investors strategically add these NCDs/Bonds to their portfolios to manage the risk component.
The companies which have good credit ratings are allowed to issue NCDs. Each issue of NCD gets rated by credit agencies. However, credit-rating agencies can change these ratings based on the companies’ performance and their ability to meet the commitments. Therefore, investors should always prefer to go for companies which have higher credit ratings. Higher the credit rating, lower is the risk. However, these investors need to keep in mind that interest rate offered will also be lower. There are NCDs which can earn based on growth of the underlying asset. In comparison to risk-free return on FDs, NCDs generally offer a higher return on investment.
Financial products like Bonds, NCDs, or any other low-risk instruments have low penetration in India. This is because India is not a do-it-yourself (DIY) market. Therefore, VSRK Capital can play a crucial role in deeper penetration of financial products carrying lesser amount of risk.
VSRK Capital can strengthen your portfolio's risk-return profile with the addition of bonds/NCDs. VSRK Capital can suggest which Bonds or NCDs to add to create a more balanced portfolio which can calm volatility. If you are planning to invest in Bonds/NCDs, reach out to VSRK Capital.