Five things to ensure before you invest in NCDs

Weakness in the stock market and the great return offered by bonds to investors rushed to the safety of fixed-income investment options. When the fixed deposit and FMPs, non-convertible debentures (NCD) have captured the imagination of investors. At this time, the problem of chronic diseases' India Infoline Investment Services is open for investment, the company offers a 11.9% 5-year obligations. Three other issues need to be prepared. However, before investing in these securities, here are some things you should check.

How secure is your capital?
You invest in debt because they want security, right? However, issuers may default on repayment of principal. This is where the credit rating of bonds is discussed. Credit rating is an independent assessment of the issuer's ability to meet its financial commitments. This is important because it also determines the price will be a command link in the secondary market. A nominal bond yields a higher price than a bond with a lower rank.

The rating is not a guarantee of perpetuity, as it may change with the fundamentals of the issuing company. Any deterioration in the credit rating will lower bond prices in the secondary market. So keep your eyes open for any change in the rating of bonds you own. Any rating change is usually announced by the agency and the media.

Is the transmitter on a solid foundation?
Unlike the case of bank deposits are insured up `1 lakh, investment in convertible debentures, unsecured by any collateral. But as the lender of the company, an investor in MNT first right on the company's assets if it is threatened with bankruptcy. But this information is only useful if the company has sufficient assets. So before you invest, take a look at the finances of the company. Check if it is properly funded, and whether it has a healthy book value. "Stay away from companies that have a strong balance sheet leverage," says Ritesh Jain, Chief Investment Officer, Canara Robeco Mutual Fund. A bit of grass here can save you a lot of heartburn later.

How liquid is the investment?
The investor is not required to hold to maturity of the subordinated securities to be traded on the secondary market debt market. It is a theory. The fact is that these tools are not very liquid and there are few buyers. In order to test the liquidity of the same type issued by a company before being taken to a sales pitch. Can 'be that some diseases are not traded in days, not the state of liquidity waiting for a product sold to the national rate.

It is the sale and purchase option?
Some diseases are called to put the drivers and options. Put Option means that the investor has the right to sell back to society NCD after a certain time when the purchase gives the company an opportunity to pay in advance. While the put option the investor prefers the rising interest rate scenario, the purchase will cushion the company if prices fall, and wants to retire high-yield disease prematurely. To find sale and purchase of options to meet your needs before investing in NCD. For example, a five-year disease Shriram Transport Finance has put and call option after 48 months, while in India Infoline Investment Services, NCD is not present, or an option to purchase.

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What is the after-tax return?
Finally, consider the tax consequences of investment. Yields being advertised by the issuers of course not take into account the tax liability of the investor. Revenue from the DTM must be added to total income for the year and taxed at the normal rate. In the tax bracket of 10% (income up to 5 lakh a year old), 11.5% lower yield of 10.35%. In tax bracket to 20% (income up 8 `lakh per year), it falls to 9.2%. And the tax bracket the greater of 30%, it is just over 8%, which is nothing more than that offered by the PPF.

Source: [ET]