{"id":1807,"date":"2022-06-27T09:16:39","date_gmt":"2022-06-27T09:16:39","guid":{"rendered":"https:\/\/investopert.com\/?p=1807"},"modified":"2022-06-27T09:21:12","modified_gmt":"2022-06-27T09:21:12","slug":"understanding-ncds-guaranteed-savings-plans","status":"publish","type":"post","link":"https:\/\/investopert.com\/?p=1807","title":{"rendered":"Understanding NCDs & Guaranteed Savings Plans"},"content":{"rendered":"\t\t
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Understanding Fixed Income Options - NCDs & Guaranteed Income Plans<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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Fixed income investments as the name suggests provides the investor with a steady and guaranteed income stream. Currently in this category we have bank post office savings schemes, bank FDs, PPFs, NCDs & savings plans from insurance providers etc. We will be covering more on NCDs and savings plans in this blog.<\/p>

NCD \u2013 Non convertible debentures<\/strong><\/p>

What are NCDs?<\/strong><\/p>

Let\u2019s understand what are NCDs. NCDS \u2013 Non convertible debentures are essentially debt instruments. Companies issue NCDs to raise funds in the form of loans. NCDs generally carry a fixed interest rate (known as coupon). This is what will be paid to the purchaser (investor) on a fixed pre decided interval i.e. monthly, semi-annually, annually depending upon how the NCD is structured. The principal amount invested is paid back to the investor at the end of the NCD tenure.<\/p>

How to invest?<\/strong><\/p>

Public Offer<\/strong><\/p>

Just like equity shares, NCDs are also offered for sale to the public through initial public offers. Advantage of investing at this stage is that you get complete flexibility to invest amount of your choice. Post this offer & listing, the lot sizes in the secondary market are generally larger & liquidity tighter.<\/p>

Listed on the stock market<\/strong><\/p>

NCDs are listed on the stock market & can be directly purchased from the exchange. One needs the keep in mind that liquidity is not at par with the equity shares and hence choice & quantum may be restricted.<\/p>

Over the counter deals<\/strong><\/p>

NCDs can also be bought over the counter thru secondary market dealers. Large dealers offer a list of NCDs available for purchase on a daily basis. Investors can approach them and get a customised list of NCDs.\u00a0 Lot size is usually large.<\/p>

What to check before investing in a NCD?<\/strong><\/p>

Two important things to check before investing in an NCD are:<\/p>

Credit Rating of the NCD<\/strong><\/p>

Credit scoring scheme used to judge the quality and creditworthiness of a bond. The rating takes into consideration\u00a0a bond issuer’s financial strength or its ability to pay a bond’s principal and interest in a timely fashion. Generally investors should stick to AAA credit score which is the highest credit rating offered to an instrument.<\/p>

Yield to Maturity and Coupon<\/strong><\/p>

The rate at which a bond makes interest payments to the investor is commonly termed as the coupon rate. It represents the annual interest rate paid out by the bond with respect to its face value, and it is denoted as a percentage. Let\u2019s take up an example to better understand the concept of coupon rates.<\/p>

Assume that a company issues a bond with a face value of Rs. 10,000. The rate of interest on this bond is set at 10% per annum. Here, the 10% per annum is what is known as the coupon rate. So, when you invest Rs. 10,000 in the bond, you will receive Rs. 1,000 per annum as interest payments.<\/p>

The primary difference between coupon rate and yield to maturity is that the coupon rate stays the same throughout the tenure of the bond. However, the yield to maturity undergoes a change depending on various factors such as the years remaining till maturity and the current price at which the bond is being traded. Let\u2019s take a simple example:<\/p>

Bond\u2019s Purchase Price\u00a0<\/strong><\/p><\/td>

Coupon Rate<\/strong><\/p><\/td>

YTM (Yield To Maturity)<\/strong><\/p><\/td><\/tr>

Face Value<\/p><\/td>

10%<\/p><\/td>

10%<\/p><\/td><\/tr>

A Price That\u2019s Lower Than The Face Value (At A Discount)<\/p><\/td>

10%<\/p><\/td>

Higher Than The Coupon Rate<\/p><\/td><\/tr>

A Price That\u2019s Higher Than The Face Value (At A Premium)<\/p><\/td>

10%<\/p><\/td>

Lower Than The Coupon Rate<\/p><\/td><\/tr><\/tbody><\/table>

For investors who purchase a bond directly from the company through a new offer with the intention of staying invested till the date of maturity, the coupon rate is what they should consider. While for bond traders, who buy and sell bonds in the secondary market, the yield to maturity is what they should consider.<\/p>

Savings Schemes \/ Guaranteed Income Plans<\/strong><\/p>

Saving schemes or plans are an important part of financial planning and long-term financial stability. These plans are offered by insurance providers. Under such plans the insured usually pays premium for say 3\/5\/10 years and then receives fixed guaranteed tax free payouts either at the end of the policy term on a lumpsum basis or on a pre structured monthly\/annual basis.<\/p>

The key point to remember here is that these inflows are fixed, guaranteed & tax free. Another salient feature is that they offer complete flexibility in premium payment amount, terms as well as their payout structures. Some benefits of such plans are:<\/p>