Introduction To Debenture:

A debenture is a financial instrument to borrow loans with legal documents for a medium or long term period of time. In many cases, it is an unsecured kind of loan, unlike traditional loan where the lender can claim or seize assets if failed to repay the amount. The debenture is promised on the basis of the reputation and financial health of the lender. Usually the it is issued by large companies or by the government.

Key Features of Debenture:

1. Regular Income

It promises fixed income in the form of the interest rate. Basically getting regular payback of the investment made.

2. Predictable Return:

Since the interest rate is fixed for a certain period of time, the return can be calculated on the investment made.

3. Less Risky Than Stocks:

These are considered less risky compared to stocks because debenture holders are creditors not the owners of the company, and higher claims can be made on the company’s assets if it goes bankrupt.

4. Can be Traded:

Some forms of debenture can be bought or sold in the open market similarly to the stocks. It allows access to money in case of need before maturity period.

Types of Debenture:

1. Secured Debenture:

These are backed by company’s assets like houses, property etc. If the company fails to repay the amount, then claims can be made on these assets.

2. Unsecured Debenture:

These are not backed by any kind of assets . These mainly rely on credibility and promise to repay. It is considered to be more risky, but along with high  risks comes the higher rate of interest.

3. Convertible Debenture:

It provides the option to convert them into stocks of the company at a future date. It allows ownership in the company.

4. Non Convertible Debenture:

It cannot be converted into stocks. It remains as a debt (loan) until maturity date.

5. Fixed Rate Debenture:

The  rate of interest is fixed throughout the term. The income is predictable.

6. Floating Rate Debenture:

The rate of interest changes depending on the market condition. The income may vary, and the chance of more return if interest rises. 

7. Redeemable Debentures:

These have a fixed maturity date when the company pays the principal amount.

8. Irredeemable Debentures:

These do not have a fixed maturity date. The company may keep paying interest until it exists or goes bankrupt and shut down.

Risks With Debenture:

1. Default Risk or Credit Risk

This is the biggest risk involved in debenture. It means the company issued the debenture might not be able to repay the amount. It is very much similar to lending money to a friend, who may not repay.

2. Interest Rate Risk:

If the interest rate of the market goes down then the value of the debenture too goes down.

For Example: Buying a debenture paying 5% interest rate a few years back. Debentures are now issued at a 7% interest rate.

3. Liquidity Risk:

Some of the debentures cannot be easily traded in the open market like stocks. It means, it can cause difficulty for selling the debenture quickly in case of urgent need of money before maturity.

4. Inflation Risk:

The interest rate earned can be lower than the inflation rate, meaning debenture investment might not match up the cost of living. The money earned can grow, but not enough to buy as much as it used to.

Advantages of Debenture:

• Fixed maturity date.
• Interest Payment.
• No ownership Right.
• Different Forms of Debenture.
• Can be Transferred

Conclusion:

Debentures represent a valuable financial instrument that can enhance an investor’s portfolio by providing a steady income. Understanding the different types of debentures, their features, and the advantages and risks associated with them is crucial for making informed investment decisions. While debentures can be subject to risks such as credit and interest rate fluctuations, careful research and strategic planning can help overcome these challenges.

FAQ’s

1. How to invest in debenture?

Companies often issue debentures to the public to raise money. You can apply with your demat account.

2. How are debenture holders?

Individuals who pay the company to purchase debentures are called debenture holders.

3. Who regulates the debenture?

SEBI (Securities and Exchange Board of India) regulates and controls the process of debenture in India.