Benefits of Bonds | srei

Benefits of Bonds

Bonds are an important asset class that financial advisors should include in client portfolios.Individuals and institutions can use bonds in many ways: from the most basic, such as for preserving principal or saving and maximizing income, to more advanced uses, like managing interest-rate risk and diversifying a portfolio. NCDs offer a secured route to participate in opportunities that arise in the debt market

Benefits of investing in NCDs

An NCD is a fixed-income debt paper issued by a company. In other words, the issuer agrees to pay a fixed interest on the investment. As the name suggests, these debentures cannot be converted into shares of the issuing company like convertible debentures where investors have the option of getting shares in the issuing company on conversion. If one is looking for an investment instrument that offers high return with moderate risk while giving flexibility of choosing between short and long tenures, NCDs may be the answer.

Some of the benefits of investing in NCDs are:

  • Higher rate of interest as compared to similar fixed income investment options. While yield on redemption of Srei NCD public issue in April 2013 was 10.75% -11.25%, effective yield of Srei NCD public issue in September 2013 was in the range is in the range of 11.50% -11.72% which compares favorably with term deposits (TD) of banks.. source:, and respective bank websites.
  • If the bonds are listed, liquidity as one can sell it in the secondary market before its maturity. However, there is no active market for NCDs on the wholesale debt market segment of the stock exchanges and their liquidity is low. You might not be able to find a buyer for your NCDs if their trade volumes on bourses are insignificant
  • Possibility of capital appreciation i.e. one can sell your bond at a price higher than your cost price in the market.
  • A bank fixed deposit or savings certificates issued by the postal department is for a maximum of five to seven years. In contrast, NCDs are available from two years to as much as 20 years.
  • Unlike bank FDs or corporate FDs, there is no tax deduction at source (TDS) on NCDs offered in DMAT mode and listed on a stock exchange as per section 193 of the I.T. Act. Income tax if any on the interest income will have to be paid at the time of declaring one's income. Interest earned on NCDs after maturity is taxed as regular income
  • Gain from selling NCDs within one year taxed as short-term capital gain. Return from NCDs sold after one year but before maturity taxed as long-term capital gain
  • NCDs are safer than equity.NCDs offer fixed returns in contrast to equity that is highly volatile. In case of liquidation of the company, claim of the NCD holder is held high in comparison to equity holders i.e. the company gives priority to the obligation towards NCD holders. NCDs are also deemed safer in comparison to company fixed deposits.

Risks in NCDs

  • An investment offering higher returns invariably comes with additional risk. The biggest risk with NCDs is the possible capital loss in case of increase in interest rates.
  • Apart from the risk of lower return or loss of capital, there is the risk of default by the company even though the chances are low as most of the firms are under supervision of the RBI and SEBI.
  • Huge debt obligations of a company mean it might have trouble repaying its debt.

Features of Non-Convertible Debentures

Returns: Both unsecured and secured NCDs give higher returns than fixed deposits. However, unsecured NCDs give higher returns than secured NCDs. Interest is paid through Direct Credit / ECS / RTGS / NEFT mode.

Maturity: RBI has stipulated that the maturity must not be less than 90 days. Maturities range from 90 days to as long as 10 or even 30 years. (source:

Risk: Highly rated NCDs generally exhibit lower credit risk. NCDs lose value when interest rate in the system goes up and gain when the interest rate declines. However, when the NCD is held till maturity one is likely to realize the promised return and the risk due to movement in interest rates will not be there.

Liquidity: Listed debentures can be sold anytime before maturity, in the secondary market. However listing does not guarantee liquidity. You might not be able to find a buyer for your NCDs if their trade volumes on bourses are insignificant

Tax: Returns on NCDs are taxed as income. Unlike bank FDs or corporate FDs, there is no tax deduction at source (TDS) on NCDs offered in DMAT mode and listed on a stock exchange as per section 193 of the I.T. Act. Income tax if any on the interest income will have to be paid at the time of declaring one's income. If you have invested through physical mode and sell before one year it is taxed as short term capital gain and if sold after one year and before the maturity date, the gain is taxed as long term capital gain. Interest received in the interim is treated as income and taxed. The income is subject to Tax Deducted at Source (TDS).

Things to be considered before investing in NCDs

Ratings: Rating agencies use simple alphanumeric symbols to convey credit ratings. For example, some agencies assign credit ratings to debt obligations on three basic scales: the long-term scale, the short-term scale, and the fixed deposit scale. AAA could be the highest Credit rating indicating highest safety. Higher rating indicates timely servicing of debt obligations by the issuer and lower amount of credit risk.

Payback History Of Company: Check if the company has any history of default on its payment. If so it is unwise to invest in the company. However if the company has a good consistence history of repayment to its creditors then it is better to invest in NCDs of that company.

Secured and Non Secured NCDs: If the company in whose NCDs you have invested has downed its shutters, it’s important for you to know where you stand when the company repays its debts. The order in which the Company repays its debts depends upon the ranking of the bonds based on the security. Bonds are either secured against assets or unsecured. If the bonds are secured, in the event of winding up of the company, it would sell off the assets against which the bonds were secured and repay the investor. However, all secured assets do not have the same ranking.

Listing & Liquidity: Debentures (convertible and/or non convertible) can be listed on a stock exchange, providing opportunities to accumulate additionally or to sell them and exit earlier than the tenure of the debenture. 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 coupon interest rate payable on them. More the liquidity better it is for the investor.

Varying Tenures: Redemption periods usually range from 2-15 years. One should choose the tenure on the basis of his/her own personal financial goals and risk appetite.

Interest Payout Options: One could look at different interest payout options offered by NCDs such as monthly, quarterly, half-yearly or annual interest payments.

Other Factors: One must also take a close look at the background and credentials of the issuing company, its financial performance over the past few years and also evaluate the sector within which the company operates and the risks involved.