Wednesday, 13 June 2012

All About Debentures - Debenture Details.

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Debt Instruments have always been the darling of conservative investors. They are always on hunt for investment opportunities that offer them either guaranteed or assured returns. Investments like Bank Fixed Deposits, Fixed Maturity Plan, Bonds, Company Fixed Deposits, Debentures, etc.

In this article let’s limit our scope to Debentures.
  • Get started with Basics of Debentures: It is fixed income instrument where in the issuer agrees to pay assured interest or returns at the time of maturity. 

  • Debenture Types:Broadly there are two types of debentures – Secured and Unsecured. Secured Debentures offer lower interest in comparison to Unsecured Debentures.  The primary reason for this is, in case company defaults, the Secured Denture holders are paid off by selling the assets of the company. This is not the case with Un-Secured Debentures.

  •  Attractive Features of Secured Debentures:
    -TDS : There is no tax deducted at source.
    -Safety: On a relative basis, they are safer than company   deposits. For more details of company Fixed deposit, click here.
    -Returns:
    Attractive interest rates. Interest rates are in range of 11%  to 12.5%
    -Flexible Tenure: Usually come with lock-in period of 3 years, 5 Years and 10 Years.
    -Liquidity: NCD are listed on National Stock Exchange, In case of premature exit one can exit by selling in secondary Market. 


    All the above points indeed reflect that Secured Debentures a good Debt Option. Off-late especially when the stock market is in Jittery mode, investors are flocking towards relatively safer options like Secured Debentures.

    Are Secured Debentures are really safe: In this Finance World, there is nothing called 100% Safe. Every investment comes with some element of risk.  Yes on relative basis, one can say Secured Debentures are Safe when compared to Equity or Company Fixed Deposits. If company defaults, the secured debenture holders are paid by selling the assets of the company against which the charge was created. This does not happen in case of company fixed deposits or unsecured Debentures.  There is possibility that a reputed company with good credit rating might fail to redeem the secured debentures. 
        Any Smart Tips:
    • First Come First Serve:  Early Bird Gets The Fish. Shiram Transport NCD and Tata Capital NCD were heavily oversubscribed.  In case you have decided to invest, apply it on Day One. You never know when the subscription will get closed.
    • Plan to Hold Till Maturity:  Watch out!!!  if you plan to trade or make quick bucks. NCD prices are impacted due to change in interest rates.  NCD Prices will move up if the interest rates decrease and vice versa.  You need to hold the Debentures till maturity if you don’t want expose yourself to price fluctuations.
    • Right Pick: Never ignore the reputation and ratings provided by the credit rating agency.  Don’t risk your investment for extra % or two.
    • Right Option: It is always advisable to opt for cumulative option. This option will provide you highest yield as the interest earned is re-invested. Choose the interest payout option only if you need money periodically or regularly. Remember Time is Money. Money grows with Time. :) Give your investments maximum time, only then you can appreciate the power of compounding.
    • Any Pre-Requirements: PAN(Permanent Account Number ) is Must to have. In case NCD are going to be dematerialized form, you are expected to have  Demat Account.
      Do you bet on Debentures?

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