InvestorQ : How should I select between which NCD to apply to?
priya Shah made post

How should I select between which NCD to apply to?

Sadaf Khan answered.
3 years ago

Non-convertible debentures (NCDs) are long-term financial instruments that are fixed-income investments. They are used as tools to raise long-term capital by companies through public NCD issuance.

A number of companies have announced their NCDs currently; in fact, a few opened today itself.

Image courtesy: Economic Times

NCDs make for good investment options. These NCDs are offering attractive interest rates, so one can look to lock in higher yields. As interest rates overall are softening, even if there are new NCDs being launched in the days to come, they might not offer as good interest rates.

NCDs are provided credit ratings by credit rating agencies. It is these ratings that help an individual decide whether to park their funds in the NCD or not.

Every company that plans to raise money will seek a rating by credit rating agencies because they know that this will impact investor decision.

A poor rating means that the rating company doesn’t believe the company issuing NCDs will service its obligations (to investors) on time. A high rating, in contrast, means the rating agency is fairly confident of the NCD-issuing company of fulfilling its debts in time.

A few credit rating companies of India are:

- Fitch Ratings - CRISIL Ltd - ICRA - CARE.

Thus, it is the investor’s responsibility that he/she ascertain the credit profile of the company issuing the NCDs. AAA rating signifies highest level of safety with minimum risk of default but these often fetch lower coupon rate, as they are safe bets.

Do note, however, that investors should not rely on the credit rating alone, and must check previous history of repayment before taking a final call on which NCD to invest in.