A Beginner’s Guide to Investments in Capital Bonds and NCDs

When it comes to the world of investment options, capital bonds and non-convertible debentures (NCDs) hold a prominent position in the debt instrument segment. These financial instruments offer unique advantages to investors seeking stable returns and tax benefits. In this insightful blog, we will explore the perks of investing in capital bonds and NCDs, shedding light on the benefits of investing in NCDs and bonds, including their safety, assured returns, taxation benefits, and more.

Why Buy Bonds | Advantages of Capital Bonds

• Safety: Capital gain bonds have AAA ratings, the highest any credit agency can assign. Further, these bonds are backed by a government entity such as Indian Railways or Electric Corporation, making them the safest investment option. 
• Assured returns: Capital gain bonds provide assured returns of around 5.75%, making them ideal for those seeking long-term fixed income. The issuer uses the borrowed money to fund projects that are vital revenue sources for the government, such as highways, railways, and electricity. Hence, you can be assured of regular payouts without fear of default.
• Taxation benefit: Capital gain bonds provide significant tax benefits of up to Rs 50,00,000 under section 54EC. The condition here is that the investment must be made using the proceeds of a property sale after owning it for more than 36 months. Also, you must invest in this scheme within six months of the property transfer.

Benefits of Investing in NCDs – Non-Convertible Debentures 

• Legitimate: Risk and fraud are two different things. ICRA, CARE, Fitch Ratings, or another reputable agency rate every private company’s NCD. The information the issuer provides is verified and authentic, eliminating the risk of fraud. Also, NCD issuers mostly fall under the purview of the Reserve Bank of India. In terms of risk, you must still conduct several assessments.
• Higher Interest Rate: NCD interest rates are higher not only in comparison to bonds but also to other investment options. Generally, the returns are 150-175 basis points higher, or about 2% higher, than bank fixed deposits. 
• Multiple Options: Unlike capital gain bonds, which only offer three to four options, NCDs provide a variety. You can easily find one with higher yields of around 9% and a good credit rating from the credit rating agencies. Moreover, if you are looking for a long-term return to secure your retirement, you can invest in NCDs with maturities ranging from 15-20 years. Investors with spare funds who want to park funds for a few months should consider NCDs with maturities of 90 days.
• Liquidity: NCDs are liquid assets, unlike most debt instruments with a lock-in period. Since the issuer must list NCDs on the exchange, you can easily trade them on the secondary market. 
• Payment Priority: NCDs have an advantage over stocks. If the issuing company’s business model fails, forcing them to liquidate, NCD holders will be given priority during repayment. The payment settlement starts with bondholders, followed by NCD holders, and lastly, stockholders.
• No TDS: Interest on NCDs is taxable in the hands of the investor. However, no tax is deducted at the source in this case.

Quick Glance at the Key Differences between Capital Bonds and NCDs:

In Conclusion

In summary, both capital bonds and non-convertible debentures (NCDs) present attractive investment opportunities with distinct advantages. Capital bonds provide a secure investment option with assured returns, tax benefits, and the backing of government entities. On the other hand, NCDs offer higher returns, liquidity, and a range of investment options with varying yields and maturities.

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 _____________________________________________________________________________________Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.