Types of Debentures

A Thorough Overview of the Types of Debentures

If you are trying to save some portion of your money in the savings bank account, then it’s high time that you begin your investment journey. This enables managing your portfolio to the best by investing in different alternatives and yielding the returns.

But before you move ahead, this article will help you in understanding different types of debentures. Alongside suggesting you the right platform to approach to manage your portfolio like a pro. So read the article to the end to learn more about different types of debentures, non convertible debentures, convertible debentures and more.

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Understanding Debentures in simple terms

Debentures are investments with fixed income made available in the capital market of a publicly limited company. They represent the loans that investors give to such companies and expect reimbursement with interest. Debentures are long-term financing instruments used by corporations and governments alike. They make raising money more flexible and cheaper relative to seeking credit lines from banks because they guarantee lower costs.

Bonds issued by the governments are mostly issued with a maturity period of over ten years. These types of bonds are safe since the government is issuing them. Companies also use debentures as a type of long-term loans. Nevertheless, corporate debentures are not secured by any asset. However, the health of the company’s finances and its creditworthiness is the only method used as collateral.

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These instruments are debt instruments with an interest rate and can be redeemed or repaid at a certain date. Generally a company is obliged to pay its loan interests before dividends to its shareholders. Debentures as compared to other types of loans are less expensive and have longer repayment periods, which is beneficial to businesses.

Why are debentures issued?

Debentures are issued by companies and governments for a few key reasons:

Raise Capital

This is the primary reason for use. Debenture works very much like a loan; that is it enables the issuing company to obtain funds for various projects or general operations. They are a type of long-term debt that has a maturity of over ten years.

Attract Specific Investors

Debentures provide debenture holders with regular interest, making debentures an appealing investment option for those looking for steady returns. This can also be attractive to risk-averse investors compared to equity shares.

Improve Debt-to-Equity Ratio

Debentures are used to raise additional debt capital without diluting equity. This can help maintain a low debt-to-equity ratio which is a key indicator that measures a company’s financial leverage.

In general, debentures offer a good alternative to companies and governments for raising funds and benefits investors with the return on their investment.

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Types of debentures

Debentures are also divided into various types. The different types of debentures are:

Convertible debentures

These types of debenture can be converted into equity shares of the company by the investors who hold debentures. The rights of the debenture holder’s, the trigger date for conversion, and the date of conversion are stated at the issuance of convertible debenture. But it also has a set of rules.

Non convertible debentures

The non convertible debentures cannot be exchanged for equity shares by the investors. Thus, investors who opt for this kind of security will always receive returns depending on either the pre-, post-fixed, or blended profitability. Non convertible debentures are beneficial for the investors who look for massive returns, liquidity, low risk and tax benefits

Registered debentures

The records of the company contain the registered details of the debenture holders. Let’s say a person possessing debentures wants to transfer the ownership to another person. This means the clearing house has to be used to transfer them and the issuer should know about any change of ownership immediately in order to pay the interest to the proper bondholder.

Unregistered debentures

Bearer debentures are another name for such debentures. Bearer debentures are issued by a company in such a way that holders do not have to keep records. For unregistered debentures, it is irrelevant the name on them when the company refunds the principal amount and the bearer of a debenture. Easy transferability characterises unregistered debentures.

Redeemable debentures

Redeemable debentures are those that have the company’s debenture certificate, this company will refund the principal amount according to the redemption date indicated in it. The individual who owns the debenture will get their principal amount back on that date of redemption.

Irredeemable debentures

Irredeemable Debentures like their name indicates are opposite to redeemable debentures in that there isn’t any specific date set for when the debenture holders will be paid back. They are only redeemable if the company goes through liquidation.

Incentivized Debentures

Incentivized Debentures are those debentures issued by the business officials that help in carrying out their strategic activities which will therefore have an impact on the development of the country. These are also referred to as the infrastructure debentures.

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Why should you invest in Debentures?

Purchasing debentures is certainly a good idea if you are looking to get more returns as compared to other fixed income investments since debenture rates are usually much higher. Diversification of assets is always the right way to go for all types of investments. The stocks may result in huge gains but they may as well bring losses. Debentures on the other hand are fairly secure investments with minimal risk. But are they the right choice for you? Here is an overview of the benefits of investing in debentures.

  • Steady Income Stream
    Debentures can be described as debt securities that are used by individuals or corporate bodies. A debenture is when you lend money to the issuer. In return, you get fixed interest on a regular basis throughout the life of the debenture. This guarantees a constant source of income that would be useful for retirees or investors who want stable returns.
  • Lower Risk
    In general debentures are less risky as compared to stocks. This is because a debenture holder is a creditor of the issuing entity. For example, during the liquidation of the company, the debenture holders have precedence over the shareholders in receiving their money. However, it is crucial to understand that not all debentures are equal. Secured debentures are secured by specific collateral put up by the issuer of debentures. On the other hand unsecured debentures completely depend on the reputation of the issuer.
  • Portfolio Diversification
    Debentures in a portfolio can also be used as a risk management tool. Debentures and stocks are therefore inversely correlated, and when the price of stocks falls the price of debentures may increase. This helps to diversify your portfolio and protect against losses when the market goes down.
  • Tax Advantages
    Debentures also have some tax advantages depending on the region you live in. A number of nations have now preferred debentures over shares as the interest received on the debentures attracts lower tax rates compared to the dividends received on the shares.
  • Variety of Options
    Debentures have a number of types which reflect the different types of investment. The convertible debentures, which are convertible in nature and allow the bearer of a debenture to convert it into shares of the issuing company of a debenture at the specified rate. This will enable you to get some sort of returns from capital appreciation if the company’s stock goes up.
  • Important Considerations
    Debentures have many attractive features but there are also some limitations. One of the unique characteristics of debentures that set them apart from stocks is that they usually pay lower dividends than stocks. Moreover, it is also very important to take into consideration the credit of the issuer. Buying debentures from companies with low credit ratings puts you at the risk of default.

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Conclusion

Debentures can be a useful instrument for investors who want to obtain regular income and to diversify their portfolios. But it is important to take into account investment objectives, risk appetite, and the credit quality of the company issuing debentures before investing in such securities. It is also important to seek the services of a financial advisor to find out whether or not the debentures are suitable for your investment plan.

Overall, debentures are a great form of investment and you can make it much diversified by opting more than one or two companies. Moreover you can make your investments much worthy by choosing the different types of debentures based on your long term or short-term growth and returns.

To get the right guidance about types of debentures, convertible debentures or non convertible debentures, consider consulting a financial advisor from a reputable investment firm like SMC Global Securities to discuss if debentures are the right investment for you and to explore the various options available.

Author:
All Content is verified by SMC Global Securities.

Reference : 

https://www.investopedia.com/terms/d/debenture.asp
https://economictimes.indiatimes.com/definition/debenture
https://en.wikipedia.org/wiki/Debenture

 

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