Bonds are units of corporate debt issued by companies and securitized as tradeable assets. In a low-interest rate environment, another investment option that appeals to investors is non-convertible debentures (NCDs) or bonds. Bonds are issued by corporates to raise funds from the public and offer a fixed return generally higher than what is available to investors from bank fixed deposits. Bonds are a debt investment where the investor’s money is not put into the stock market.
Tenure: Investments in NCDs may have a duration of up to ten years, starting from around 12 months. The rate of interest offered is typically lower for shorter durations than it is for bonds with longer durations. To manage bond risks, one can either stay with shorter-duration investments or stagger investments over a range of tenures.
Interest Payouts: Bonds may provide alternatives for interest payment schedules including monthly, quarterly, half-yearly, annual, and cumulative. Select the one that best suits your needs based on a regular income, but keep in mind the impact of taxes. Interest income is included in one's income and is fully taxable in accordance with one's income tax bracket. If you hold the bonds in demat form, there won't be any TDS deducted; otherwise, there would be an incidence of TDS if the yearly interest reaches Rs 5,000 in any given fiscal year.
Liquidity: Bonds may have less liquidity and often come with a cost. Bonds are traded on stock exchanges, but investors selling there may not receive the best price because of potentially limited liquidity. Only apply for bonds if you intend to hold them until they mature.
Safety: The ratings are crucial in determining the riskiness when it comes to the safety of bond investments. The position of the issuer in meeting its financial obligations, such as paying interest when it is due and paying the maturity funds on schedule, is reflected in the bond ratings. Bonds with good ratings may have cheap or competitive rates, whilst bonds with bad ratings may charge investors higher interest rates. Investors should keep in mind that the financial condition may vary over time because ratings generally reflect the financial status at the time the rating exercise is done.
What to consider before investing in NCDs
If the interest rates offered by the NCDs are significantly higher than those of the market or other similarly priced competitive NCDs, they can be viewed as carrying a higher risk. Instead of only going with NCDs with high-interest rates, choose to invest in well-known, established businesses. Lastly, before investing in NCDs, be sure to read the prospectus's section on risk factors. Making better-informed investment decisions will be easier if you are aware of the risk upfront.
Highlights
- Corporates sell bonds to raise money from the public by promising a set return that is typically higher than bank fixed deposits.
- Listed on stock exchanges, however, there may not be much liquidity there in Bonds
- Interest income is included in one's income and is taxed according to investor's income bracket.
- Compared to bonds with lesser ratings, high-rated bonds may offer cheaper or more competitive rates.
- Certain bond issues might be secured, while others might be unsecured.
- Options for interest payments include monthly, quarterly, half-yearly, annual, and cumulative.