Investment in debentures is Good or Bad.
                     INVESTMENT IN 
DEBENTURES IS 
GOOD OR BAD?
What is Debenture?
 A debenture is a form of debt security, an ‘IOU’ issued by a 
company. A debt security represents borrowed funds that 
the borrower has an obligation to repay, and includes such 
financial instruments tender as bonds and certificates of 
deposit.
Source: 
moneymanagement.com
HOW TO ISSUE DEBENTURE?
•Debentures are typically issued by corporations or finance 
companies in return for medium to long-term investment of 
funds for up to five years. 
•Debenture holders’ funds are invested with the borrowing 
company as secured loans, with the security usually being a 
form of entitlement to the assets of the borrowing company.
Source: 
moneymanagement.com
RISKS ASSOCIATED WITH 
INVESTING IN DEBENTURES
Source: indiafillings.com
 INTEREST RATE RISK
•The majority of debentures and unsecured notes have a 
fixed rate of interest and a fixed repayment of capital 
amount. 
•The main risk that fixed-rate debentures and unsecured 
notes holders are exposed to is the opportunity cost that 
a better rate of return may be available elsewhere if 
interest rates were to increase.
Source: 
moneymanagement.com
 CREDIT/DEFAULT RISK
•The credit risk is the risk that the investor’s interest and/or 
capital are not repaid by the borrower. 
•Factors that affect the credit risk include the ranking of the 
debt in terms of repayment upon liquidation of the 
company, purposes the investors’ funds will be used for, 
and financial strength of the company.
Source: 
moneymanagement.com
 LIQUIDITY RISK
•The majority of debentures and unsecured notes do not 
offer a readily available exit mechanism and as such 
should be considered a relatively illiquid investment.
• Issuers may allow the investor to access their original 
capital investment at their discretion in special 
circumstances.
Source: investopedia.com
 BENEFIT OF DEBENTURES
•From an investor’s viewpoint, the prime advantage of 
investing in debenture is the fixed and stable return. 
•They not only get that benefit but also a preferential right 
of payment at the time of liquidation. Whereas that is not 
in case of equity or preference shares. 
Source: capital.com
ARE DEBENTURES WORTH 
PUTTING YOUR MONEY IN?
• Investors are warming up to non-convertible debentures 
(NCDs) in a big way. India Infoline, the first among the four 
public issues of NCDs that are lined up, was 
oversubscribed and closed three days before its scheduled 
date for closing the issue for subscription.
• Interest rates are on their way down and subsequent 
issues could be at lower rates. So it makes sense to invest 
now rather than wait for higher rates.
Source: 
moneymanagement.com
DO NOT GO BELOW 'AA' RATING
•Most investors and experts give a lot of weightage to 
rating of an NCD. While an 'AAA' rating implies highest 
degree of safety with respect to timely payment of interest 
and principal, an 'AA' rating indicates adequate safety with 
respect to timely repayment of interest and the principal.
•Do not go for any issue which is less than 'AA' rated.
Source: forbes.com
SCAN THE SECONDARY MARKETS
•Check if any NCDs are available at a discount in the 
secondary markets for the same tenure. 
•However, since the secondary markets are illiquid, if you 
want to buy for higher amounts, say Rs 2 lakh and above, 
the price of the NCD may go up. Besides this, there is 
brokerage to be paid on secondary market transactions.
Source: 
moneymanagement.com
CHECK TRADING HISTORY
•All NCDs on offer have a past trading history. Hence, 
while investing, it would make sense to opt for 
companies which have a diversified product portfolio, 
and come from a group which has a long business 
history.
Source: traderlife.com