Exploring NCDs: A Safe Investment Option for Beginners

As a beginner investor, understanding financial instruments like non-convertible debentures (NCDs) is a great way to build a foundation in structured investments. Poonawalla Fincorp recently announced plans to raise Rs 190 crore through NCDs, offering a practical example of how companies raise funds while providing opportunities for investors seeking stable returns. Alongside this, the adoption of technology in human resources has been revolutionizing operational efficiency, further complementing financial strategies.

What Are NCDs and Why Are They Important?

Non-convertible debentures are fixed-income securities that companies use to raise funds without diluting shareholder equity. Unlike convertible debentures, they cannot be converted into shares, making them ideal for companies that prefer debt financing over equity-based options.

The NBFC’s recent plan involves issuing Rs 100 crore in NCDs with an additional Rs 90 crore available through a green shoe option, bringing the total to Rs 190 crore. These secured, rated, and redeemable NCDs are listed on the Bombay Stock Exchange (BSE), ensuring liquidity for investors. With a face value of Rs 1 lakh per debenture and a coupon rate offering 2% over the applicable base rate, they are designed to attract income-focused investors.

Why NCDs Are Beginner-Friendly

For beginner investors, NCDs are a great entry point into the world of investments. They offer predictable returns, making them less risky compared to stocks. Here’s why they could be suitable for you:

Stability: NCDs provide fixed interest payments, ensuring a steady income stream.
Safety: Secured NCDs, like the ones in this case, are backed by the company’s assets, reducing the risk of default.
Liquidity: Being listed on the BSE means these NCDs can be traded before maturity, offering flexibility if you need to exit early.

By investing in NCDs, you can gain experience in fixed-income securities while diversifying your portfolio.

Financial Context of the Issuance

The decision to issue NCDs comes as the NBFC addresses financial challenges. As of September 2024, the company reported an asset under management (AUM) of Rs 28,396 crore but faced a consolidated net loss of Rs 471.04 crore in Q2 FY25, compared to a profit of Rs 860.17 crore in the same quarter the previous year. Its total income also declined by 36.4%.

For a beginner investor, this financial backdrop is a reminder of why due diligence is essential before investing. While the company’s financial struggles highlight the need for raising funds, the secured nature of these NCDs provides some assurance for investors.

How Technology Supports Financial Strategies

The financial sector has been increasingly leveraging technology to improve operational efficiency, including in areas like human resources. Companies like Poonawalla Fincorp are issuing NCDs and often rely on streamlined HR processes to manage their workforce effectively. Automated systems powered by technology help in recruitment, performance management, and employee engagement, enabling companies to focus on core financial strategies.

For example, predictive analytics can forecast workforce needs, ensuring the right talent is in place to support initiatives like NCD issuance. By integrating technology into operations, companies enhance productivity, which indirectly strengthens their financial position.

NCDs vs. Other Investment Options

As a beginner, you might wonder how NCDs compare to other options. Here’s a quick comparison:

Fixed Deposits: While FDs are low-risk, their returns are often lower than those of NCDs.
Equities: Stocks have the potential for high returns but come with significant volatility. NCDs offer a more stable alternative.
Mutual Funds: These diversify risk across various assets but are influenced by market performance. NCDs provide fixed returns, making them more predictable.

For someone starting their investment journey, NCDs offer the right balance of safety and returns, making them an attractive option to consider.

Lessons for Beginner Investors

The Rs 190 crore NCD issuance offers valuable lessons for those new to investing:

Research is Key: Always analyze the issuer’s financial health before investing.
Understand the Instrument: Learn about the terms and conditions of NCDs, including coupon rates and maturity dates.
Diversify: Don’t put all your money into one type of investment. Use NCDs as part of a broader portfolio strategy.

By understanding these principles, you can make informed decisions and build confidence in your investment choices.