As time has changed, will your investment product also change? What can be your next purchase from the market?

Wed, Mar 13, 2019 1:11 PM on Bonds & Debentures, Recommended, Stock Market,

“The equity shares, fixed deposits and debentures resemble the three hands namely hour hand, minute hand and second hand of a clock.” The current declining secondary market is an accurate resemblance of an hour hand which travels in a relatively slow pace. Similarly, the minute hand, establishing balance between the second hand and hour hand, represents the fixed deposit interest rate which is decided on the basis of demand and supply of loan in the economy. Thirdly, the second hand that moves in the fastest pace can be regarded as non-convertible debenture that provides highest return. Finally, the clock symbolizes the financial system of our economy. Besides, the clock also symbolizes how time has changed and investors can be in benefit by choosing other types of investment products.

Investors usually prefer higher return from the invested capital. Until few years ago, investors had limited alternative between fixed deposit and equity shares to invest their capital. The later involved high amount of risk whereas the former provided lower return. The era of non-convertible debenture began however; most of these debentures did not stand to the expectation of investors.

The main feature of non-convertible debentures is higher return. If we analyze the current situation, the average interest rate provided by commercial banks in FD is 8.92%. Similarly, the average interest rate provided in fixed deposits for last 10 years is 7% approx. Besides, the NEPSE 25 years historical CAGR is 11% approx along with the risk that equity investment possess. However, the newly issued and issuing debentures provide return of around 10% or more. This shows that debentures can be a good purchase to investors.

The table provides detailed information on current return provided by fixed deposits, NEPSE and debentures:

  

What are the major benefits of debentures over fixed deposits?

One of the major benefits of debentures over fixed deposits is the higher return that debenture provides. Besides, the interest rate that has been provided by debentures can be locked in for a longer period of time. This can be very useful for banking economy like ours where interest rates constantly fluctuate.

Are there risks involved with debentures?

Provided that debentures provide higher return, the risk associated with debentures is also high. Similarly, liquidity can be an issue for debenture holders. Investors can withdraw from fixed deposit with a charge however; it is not the case with debentures. The invested amount gets locked with company and can be withdrawn only after the maturity of the issued debenture. Similarly, the investment can be in a problem if the company messes with principal amount.   

Who are in benefit by investing in debentures?

Those investors who are proponents of long term investing and value higher returns are the true prospective investors for debentures. If an investor perceives that the idle money should be invested for a long term return, then debentures can be the best choice. However, before jumping up with an investment of a huge lump sum of money into debentures, investors should do their own homework of analyzing the company.