What Are Debentures? Meaning, Features, Types And More
Published by Outlook Money
Abhishek Kumar's role: Quoted
Abhishek Kumar said debentures carry single-issuer default and liquidity risks that diversified debt funds do not. He suggested treating them as a small satellite holding, checking ratings and issuer finances, and that risk-averse investors stick to FDs or gilt funds.
What Abhishek Kumar said
How do debentures compare with debt mutual funds?
Debentures can offer higher yields than fixed deposits, broadly in line with what debt funds earn. But unlike a diversified debt fund, a debenture depends on a single issuer, so you carry that one company's default risk, and it can be hard to sell when you need the money. I would weigh those risks against the extra yield before putting money in.
What should I check before buying a debenture?
I would start with the credit ratings, preferring AA- to AAA from more than one rating agency. Read the offer document for details of any collateral, and study the issuer's finances, including interest coverage, leverage and cash flows. Compare the coupon with similar issues, and limit exposure to any single issuer to 5% of the portfolio to keep concentration risk in check.
Where do debentures fit in a fixed-income portfolio, and who should avoid them?
Depending on how much risk you can take, investment-grade debentures can at most be a satellite holding of about 5% to 15% of the fixed-income portfolio, never the core, which should stay in debt funds or FDs. Risk-averse investors should avoid them and stick to FDs or gilt funds, though a small allocation below 5% to AAA-rated public sector issues may suit those seeking modest returns.
In our words, from what he said in the piece. General information, not personal advice.
More of Abhishek's views on money management
The article explains what debentures are, how they differ from bank loans, and the main types, including convertible, non-convertible, secured, unsecured and perpetual debentures. It also covers their key features and the credit, interest rate and inflation risks investors face.
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What Are Debentures? Meaning, Features, Types And More