How To Earn More Returns On Your Investments In Non Convertible Debentures NCD

A few years back, stocks and bonds were the only known options to invest in capital markets. But today the picture is different; there has been a spate of different instruments that have spoilt an investor for choice. A prime example of this is Non-convertible Debentures (NCDs) that offer a debt investment option. Interestingly, most investors consider NCDs a means to earn traditional fixed returns over a fixed term, but what they don't know is they can get even higher returns if they take into account some additional factors.

Ramya bought into the NCD of a financial company around 4 months ago and is pleased with the high return that she will be earning on it. This figure is far higher than what she would get by investing in fixed deposits with her bank. However, she was surprised to learn that at the current juncture she could actually book the returns of a couple of years in this year itself.

Analysis

Non-convertible Debentures are a good option for those who are looking beyond the traditional fixed deposits and other small savings instruments or for those who want to create a diversified debt portfolio by investing in different instruments.
What are Non-convertible Debentures?

Non-convertible Debentures are a kind of debt securities issued by companies to raise funds from the market. They offer a certain income at relatively higher interest rates than convertible debentures. These debentures can be redeemed after a specified time period so the amount invested, which is equal to the face value, will be returned to the investor.

Ramya is pleased with her NCD investment as its higher interest rate will bring her higher returns. But she can expect a further increase in her returns if she employs the two options available to her.

Option 1: Receiving interest annually
The interest/returns on NCDs are paid at different time periods, say, quarterly, semi-annually and annually. Among the three, the annual option can lead to a further increase in the interest rate.

Option 2: Trading NCDs in secondary market
Most of the NCDs are listed and traded regularly at a price on the stock exchange. This enables an investor to make additional purchases and sales in the NCDs. But investors have to be careful about the price movement of the instruments which in turn depends upon the interest rate movements and the applicable interest payable on them.

1. When interest rates fall…
   A fall in the interest rates will push up the prices of NCDs. The extent of the rise and fall depends upon the interest rate on the NCD and the time remaining till its maturity.
   A look at the traded price of the NCD bought by Ramya shows that there is a sharp 14-15 per cent gain on it. Investors who are comfortable and knowledgeable about the debt market can sell their holdings and book some higher returns in such conditions.
2. When interest rates rise…
   A rise in the interest rates will reduce the price of NCDs. This is a good opportunity for potential investors to buy into these instruments at low rates. When there is a subsequent cooling off and the interest rates come down, there will be a rise in the price of NCDs, leading to a gain for investors. This will ensure that there is a capital gains for investors apart from the regular interest that is being earned.
   Also read: How to build a retirement plan?

   Ramya has to check for the situation in the specific NCD issue that she has invested in and track the price of the instrument on the stock exchange. Since most of the new issues are now listed it will give her an idea about the nature of the investment as well as the kind of volume that is generated in the investment. The amount of turnover in the NCD is also vital because there has to be adequate liquidity present for the investor.

What should Ramya do?

If Ramya wants higher returns then she will need to choose the second option of looking at the traded prices of NCDs. Under the first option, she will hold the investment and then sit on it, earning a fixed income on the instrument. The other option will enable her to make purchases and sales after considering interest rate movement over a period of time to ensure that the returns that are generated are slightly higher. There is a risk element here because the debt market situation might not turn out as expected but in the search for higher returns this is inevitable.