Debentures are classified as convertible or non-convertible.
Convertible debtentures are those that, after a certain period of time, can be converted into equity shares of the issuing company. These bonds are appealing to investors because they can be converted, but they pay a lower interest rate.
Debentures that are not convertible:
This financial product cannot be converted into equity shares, and upon maturity, the principal amount plus accumulated interest is paid to the debenture holder.
NCDs are also classified as secured or unsecured. Secured redeemable non-convertible debentures are backed by the debenture issuing company's assets, and if the company fails to make payments, the investor can liquidate the assets to receive the payment.
The Advantages of Non-Convertible Debentures
It provides a high rate of return and, while it cannot be converted into equity shares at a later date, it can be traded on the stock exchange. So, if a debenture is liquidated, the money is returned, which is not the case with a bank fixed deposit. This is why non-convertible debentures appear to be a good investment option, and people have been investing in them in greater numbers recently.
Non-Convertible Debentures Have Risks
They do not provide any form of ownership in the company, such as shares. They also do not provide favorable returns during a recession if sold before the maturity period. Last but not least, NCD returns are taxable, and debenture holders must pay taxes based on the income tax bracket in which they fall. This is also true in the case of a pre-maturity period sale.
Why Should You Invest in NCDs?
Many investors believe that investing in NCDs is advantageous. People are increasingly interested in NCDs because they do not want to be restricted to fixed bank deposits. These debenture markets are expanding, and many companies use debentures to raise capital on a regular basis.
As a result, non-convertible debentures are a wise and profitable financial product. Individuals seeking higher and more secure returns should consider investing in NCDs. To ensure the security of one's investment, one must conduct extensive research on the issuer's general creditworthiness and reputation before investing in an NCD."""
