Advantage(s) of Investing in NCD's:

The term NCD stands for Non-Convertible Debenture. It is a form of loan raised by corporates raise to meet their expansion plans and businesses.  NCD is not new for Indian Investors. Many of us are used to investing in them in the past. But the fact is most of us have been looking at NCD as pure fixed deposit. There is a smart way of Investing in NCD. Before understanding the smart way, let us understand some of the basic features of NCD:

• NCD's offer fixed interest for specific duration like 3 years or 5 years. 
• Just like IPO's, NCD's are issued by the company for short period of time. Unlike IPO's, NCD's are issued only at face value. There is no premium. 
• Though there is option to get the NCD in physical mode or demat mode, demat mode is better from 'smart' investment point of view. 
• NCD's on allotment are listed on stock exchange like NSE/BSE. 
• On the stock exchange the listed price of this NCD may keep changing depending on prevailing interest rate conditions. If this prevailing rate is lesser than the rate at the time of allotment  of NCD, then the NCD starts trading at premium. For Instance, Rs.1000 face value NCD may trade at Rs.1100 if Interest rate is reduced. Vice versa is true in a rising interest rate conditions. 
• Investors who hold these NCD's will get the investment value, apart from periodic interest payments. 
• In the mean time, if the NCD's market price is more than the allotment price, Investor can sell them in the market and encash the market premium. 
• Interest is paid only if the NCD's are held on the book closure date for interest payments.

Now the Smart Way of Investing:

• For instance if you invest Rs.100000 in NCD, if the face value is Rs.1000 per NCD, you would have got 100 NCD's alloted.
• If this NCD offers 11. 5% interest rates, then you would get Rs.11,500 as interest once in a year.
• In the mean time if RBI reduces interest rates ( for lending and deposits), then this NCD offering higher interest rates start trading at a premium.
• If interest rate is reduced by 1%, Against its allotment price of Rs.1000, this NCD may trade at Rs.1050. It makes sense to sell this NCD now - since the investor gets 1050*100=105000, fetching him straight profit of Rs.5000 (5%).
• If this investor is smart enough to get his first interest rate and then sell it, then he would get Rs.11500 as interest and Rs.5000 as capital gain. In total he would have got Rs.16500 (16.5%) to be precise.
• Like wise, the below mentioned table would indicate the extent of capital gain on existing bonds, when interest rates fall.

• Above all, unlike Fixed deposits, NCD investors can always exit their investments at any time. They can sell their NCD's either in full or in part and liquidate their investments.

• All these facts make NCD an interesting proportion to invest. When equity market is stagnating and investors donot find anything interesting, Investing in NCD's can be rewarding.

Currently Shriram Transport has come out with a NCD offering 11.4% interest. Probably it may take one to two years for interest rates to get reduced. By then your investment would have appreciated apart from the interest you receive !