As fixed deposits continue to lose their shine, owing to a steep fall in their interest rates, investors are looking around the market for better and more sustainable sources of investment. As an investor, it is important to remember that the market is subject to volatility and we must never place all our funds in just one mode of investment. Diversification is the key to success in the market. By diversifying his funds, in case a person loses his investments in even one sector or mode of investment, he will continue drawing profits from his other modes of investments. Keeping the current market scenario in mind, due to the massive slash in interest rates of Fixed Deposits, non-convertible debentures are offering smaller but consistent returns to their investors. Quite a few reputed organizations, over the last few months, have sold their debentures to other retail investors, thereby leading to their listing in stock exchanges.
Non-convertible debentures function in an entirely different manner as compared to the fixed deposits of banks. They lack the feature of liquidity and have a comparatively difficult procedure for exit, unlike fixed deposits that can be liquidated in an easy and quick manner. Although non-convertible debentures are listed on stock exchanges, many people believe that they offer a choice of daily exit. This is just a theoretical concept as their volumes are quite limited, and as a result, on some days, no exits are recorded at all. Non-convertible debentures are best suited for individuals who do not have a large risk appetite and do not want to rise and fall as per the fluctuations of the market. But just because of their conservative nature, you cannot ignore the importance of research before opting for a non-convertible debenture. Just as in case of shares, investors need to exercise suitable caution before making the choice of non-convertible debentures. Do not just focus on the rate of interest that is up for offer. Instead, analyze the pros and cons of the company before registering for its debentures. Ensure that its credit quality pertains to the highest standards set in the market as it is a reflection of the reliability and consistency of the company. Try and understand why such a company is trying to raise funds by way of debentures from the public. Generally, it is acceptable to raise funds for expansion, starting another business venture, or to meet their working capital requirements. However, if the company is trying to raise funds to pay back their loans or even a single loan, then you have some reason to worry about making such an investment.
In order to invest in non-convertible debentures, you need to have a Demat account. But this instrument is not very accessible to all strata of citizens. It is mandatory to have a broker in order to deal with non-convertible debentures, unlike mutual funds which can be handled by any individual. You need to choose between buying your non-convertible debentures from an initial public offering or IPO offered directly by the company, or as an instrument listed on the stock exchange. All debentures that have been listed on the stock exchange have, in recent times, quoted a premium, and thus, there can be a fall in the rate of yield if you make purchases from the stock exchange. Non-convertible debentures are expected to perform exceedingly well over the next few months owing to a significant rise in their rates. If you come from a higher tax bracket, you need to decide if you want to continue your investments in mutual funds, owing to the high liquidity of funds, or shift your funds to debentures, that are comparatively less liquid in nature.