Interest rates may be the biggest incentive that draws an investor towards NCDs. However, as an investor there are certain things he/she needs to watch out for while opting for NCDs.
First and foremost the investor must look at the financial strength of the company. But looking at the profitability of the company is not enough. The investor should also check other factors such as sources of revenue of the company and whether the company has a diverse portfolio or it is majorly dependent on just one source. Since it is mostly NBFCs that are issuing NCDs now, also look out for the asset quality of the NBFC.
The asset quality of the company may be judged from its level of non-performing assets or NPAs. This is particularly relevant in case of gold loan NBFCs or companies that have a high exposure to sectors such as real estate, which is subject to volatility.
The credit quality of the company issuing an NCD may also be judged from the ratings it receives from credit rating agencies such as ICRA, CRISIL or CARE. All NCDs are assigned a rating before they make a debut and you can be assured of the safety or credibility of the company and even a guarantee of the rate of interest if the NCD has received a high rating from such rating agencies.
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