What are debentures?
Bonds are a well-known investment opportunity where companies and corporates seek debt funding from retail investors, and the investors get fixed-interest payments for the money that they have lent.
But there is a lesser popular investment option similar to bonds that could have an equal amount of potential. They are debentures. But what are debentures? How beneficial is investing in them, and how do they differ from bonds? Let us take a look.
How do debentures work?
They are fixed-income instruments issued by companies when they are in need of capital. Similar to bonds, debentures also give their investors a fixed-income payment, and the invested amount will be paid back to the investor at the end of the tenure. These investment options usually have long-term tenure, which sometimes can be above ten years. Hence, these work the best for investors who are looking for long-term investment.
Types of debentures
There are two types of debentures – convertible and non-convertible.
Convertible debentures are the ones that can be converted into other securities like stocks of a company. Their face value is highly dependent on the stocks of the company as well.
On the other hand, non-convertible bonds are not convertible to any other security. Due to this, they carry a higher interest rate and have a fixed face value.
- Non-convertible debentures have lower interest rates compared to convertible one.
- Non-convertible debentures have a fixed face value. That means the money that you receive at the end of the tenure is fixed, and it won’t get affected by market conditions. On the other hand, convertible debentures’ face value depends on several factors, including the price of the stock. This is because of the fact that they are convertible.
- The above point also means that market conditions affect the performance of a convertible debenture. Better market performance of the company in the stock market affects the performance positively and vice-versa. At the same time, non-convertible debentures are not market-linked, and hence, market performance doesn’t directly affect their returns. This also means that you should do proper market research as well before investing.
- While both investment options are less-risky, non-convertible debentures have a higher risk of non-repayment.
- Convertible debenture owners enjoy dual status – as the debenture owner and the equity owner.
Bonds vs debentures - how do they differ?
Debentures and bonds are two investment options that have many similarities. But they have their share of differences too. Below are some of them.
- Bonds are issued by public companies and government agencies mostly. At the same time, debentures are mostly issued by private companies. In a way, debentures can be called the bonds of private companies.
- The biggest difference between the two is in the collateral. While bonds are usually backed by collaterals, debentures are not. This makes debentures slightly risky when compared to bonds. To cover for the same, debentures usually carry higher interest rates.
- Debentures tend to have a shorter term than bonds.
Why should you invest in debentures?
The biggest advantage of debentures is that they offer a low-risk investment option that gives better returns than other conservative options like a fixed deposit. They are a great tool for the diversification of your portfolio as well. Since the interest rate and tenure of the debentures are fixed, it makes investment planning easier. It is also a beneficial place to park your larger corpus for longer periods of time as it usually beats inflation.
Conclusion
Debentures are most beneficial when invested with proper planning. Choosing the right platform to invest in is equally important. That is where Scalerich comes in. We provide a platform for you to understand and invest in them with utmost ease. Login to Scalerich and start your debt investing journey today!
