NCDs and other Debt Instruments
- Rajeeve Kaushik
I have been getting regular queries about investing in NCD on nonconvertible adventures and various type of bonds .
To start with as a nonresident, you cannot apply in these NCD and few other type of debt instruments, except the debt mutual funds .
However, you may invest in your spouse name by first transferring to her bank account and then letting her invest directly from her account.
There has also been appointed that these are SEBI regulated and controlled .
This may be a matter of slight comfort, but actually in case of a default which is more likely in case of a debt instrument than equity- the process to get your money back maybe quite long.
Secondly, you must remember that with the new tax rules. The interest on those date instruments will be added to your income and not your spouse’s .
And now the mechanics of debt and debt instruments …
Debt is most essential to the working of the economy and development, whether of a country or a company or any entity, which needs to work . Just like you take various loans for your needs the government and companies also do the same.
The same way that you have the rate of interest attached to your loan. It is also part of the debt instrument which the government or companies use.
Only thing here is that the debt paper, whether it be the government treasury bill or corporate commercial paper or debentures of various types or corporate fixed deposits they are all tradable in the market, which means somebody can buy them at a higher or lower interest rate than what is printed on it, which is called the coupon rate .
It is this buying or selling, which creates the opportunity to make profit in various types of debt funds .
The tenure for which a debt paper is issued determines that which category of the debt fund it belongs to .
For a individual, it is virtually impossible to invest directly in a debt fund, because not only each paper is of substantial value which goes in lacks and crows, but there is a quality of debt rating, which is issued by various agencies that determine the safety of a debt instrument .
So just like you prefer not to buy shares because you have to do too much research in that and you prefer to buy via equity MFs - in the same way it is always advisable to invest in different types or duration of debt funds.
This is the best way to secure your investment while ensuring reasonable return returns on it .
I personally find debt funds as the best asset allocation to fix income instruments .
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