Secured Non-Convertible Debentures (NCDs) are generally considered safer than unsecured NCDs. This is because they are backed by the company's assets, offering a degree of security to investors.
Understanding NCD Safety
NCDs, or Non-Convertible Debentures, are debt instruments used by companies to raise funds. They are not convertible into equity shares, hence the term "non-convertible." The safety of an NCD primarily depends on whether it is secured or unsecured:
- Secured NCDs:
- These are backed by the assets of the issuing company.
- In the event that the company defaults on its payments, investors can recover their dues by liquidating the company’s assets.
- This provides a safety net for investors, making them a preferred choice for those who are risk-averse.
- Unsecured NCDs:
- These are not backed by any specific assets.
- They are riskier because if the company defaults, investors have little recourse for recovering their funds.
- These are typically offered by more established and creditworthy companies.
Why Secured NCDs are Safer
The key difference lies in the security offered:
- Asset Backing: As highlighted in the reference, secured NCDs give investors recourse to the company’s assets in case of payment defaults. This offers a tangible safety net.
- Risk Mitigation: The possibility of recovering dues via asset liquidation makes secured NCDs less prone to total loss, thus lower-risk for investors.
Practical Insights
When deciding between secured and unsecured NCDs, consider the following:
- Risk Tolerance: If you are a risk-averse investor, choose secured NCDs.
- Issuer Creditworthiness: If opting for unsecured NCDs, thoroughly assess the issuing company’s financial health and credit ratings.
- Diversification: Diversify your investments to reduce the overall risk. Consider allocating funds to different types of investments.
Summary Table
| Feature | Secured NCDs | Unsecured NCDs |
|---|---|---|
| Asset Backing | Backed by company's assets | Not backed by any assets |
| Safety | Generally Safer | Generally Riskier |
| Risk | Lower Risk | Higher Risk |
| Recovery | Dues recoverable via asset liquidation | Recovery may be difficult or impossible |
Therefore, while all investments carry some level of risk, secured NCDs provide a greater sense of safety compared to their unsecured counterparts. The availability of company assets to recover funds in case of default, is a crucial security feature.
