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What are the main things to consider before investing in NCDs?

NCDs are fixed income products, which means they promise to give you a fixed interest rate at the end of the tenure. However, if the company defaults you may not get the money. Hence, it is important to check a few important things before you invest in a NCD:

● How safe is your capital? NCDs are rated by rating agencies and give you an insight on the ability of the issuer to meet its financial commitment. A higher rating {like AAA} indicates timely servicing of debt obligations by the issuer and a lower amount of credit risk compared to a low rated NCD. It is advisable to invest in NCDs that have higher ratings like AAA+, AA+, and the like.

● Is the issuer financially sound? NCDs are not backed by any guarantee, like fixed deposits. However, as a lender to the company you get the first right over the company’s assets if for some unfortunate reason the company faces liquidation. So before investing in a NCD, do check the company’s financials and make sure its sufficiently capitalized, is profitable, is not overleveraged and has a good track record of meeting its debt obligation (like interest and loans) on time.

● Payout options : Look for the payout options offered by the issuer to see if they have something that suits your needs. In case of payout, you can pick monthly, quarterly, annually or cumulative. When you opt for cumulative returns, you will get a slightly higher return compared with, say a monthly payout. The reason to pick the payout option depends on when you need the money and for what purpose and see if the NCD has these options for you.

● Are NCDs liquid? NCDs are listed on stock exchanges, making them a liquid investment option. Investors can buy and sell NCDs, providing them with an exit route in an emergency.  However, they may not have any volume online, so check the track record of liquidity of the company for their previous offers.

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