What factors you should check before investing in NCDs?

Question

Accepted Answer · 2023-12-13

Before you participate in any NCD issue, you should check below factors:

NCD issuer’s credit rating: It is the most important factor to look for before choosing NCD for investment. Every NCD is rated by a credit rating agency like CRISIL, ICRA, etc. A higher credit rating indicates that the issuer is capable of paying off interest timely. You must select AAA and AA-rated debt instruments for investment as they have less risk. One can even choose to invest in low-rated NCD securities, but not ignore the high risks in pursuit of high interest.
Coupon rate: Coupon rate is the interest rate that investors will get during a fixed interval of time on investment in NCD. High coupon means high returns or vice-versa.
Post-tax returns: Returns on NCDs are taxed at applicable tax rates, so if you are in a high tax bracket, it may not be worth investing in NCDs as returns will be taxed at 30%.
Issuer’s reputation and credibility.

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