Some financial institutions offer non-convertible debentures (NCDs) with a promise of high rate of return on your investment. These returns are certainly far higher than the regular risk-free investments — bank fixed deposits, for instance. However, prospective investors must remember that these high interest investments usually carry a certain degree of risk at the same time.
Let us find out whether such investments are worth making:
Risk in subscribing to debentures
Investors must be mindful of the risk one undertakes while subscribing to the issue that promises a high rate of interest. A higher risk is usually compensated for by a high rate of interest. The safer the investment, the lower the interest given.
To assess the risk factor, one can take note of the credit ratings of the issue.
For instance, CRISIL AAA rating means highest safety, AA refers to high safety and A refers to adequate safety. At the same time, BBB refers to moderate safety, ‘BB’ means moderate risk and ‘B’ means high risk.
Sample this. Indel Money in September-October 2021 offered redeemable non-convertible debentures that promised to double the investment in 71 months. The interest rate offered ranges between 10.5 percent to 12 percent per annum. The CRISIL ratings for this issue stood at BBB/Stable.
“One should not get tempted by the high interest rates only. It is advisable to exercise due caution before taking a plunge. There are several factors one must consider, including the credit ratings,” says Deepak Aggarwal, Delhi-based financial advisor and chartered accountant.
Corporate and NBFC FDs
Not only do NCDs offer high rates of interest, corporate and NBFC FDs also give tempting rates of interest when compared to the bank FDs. For instance, while SBI offers interest at the rate of 5.1 percent for two-year FD, as on September 28, 2021, Bajaj Finance offers 6.2 percent for two-year deposits. Similarly, HDFC offers 5.85 percent per annum on two-year deposits.
So, we can summarise here that subscribing to a non-convertible debentures (NCD) of an NBFC can be a pathway to earning a high rate of interest but it is prudent to exercise due caution and make sure that you do not compromise safety of your investment in a bid to earn extra.