Why a debt IPO may be a safer bet than equity


Equity-related initial public offerings (IPOs) continue to appeal to investors, primarily because of their potential for immediate high returns. In India, there is immense interest in the IPO opportunity among short and long-term retail investors despite the underperformance of several IPOs in the recent past.

We are seeing a noticeable shift in mindset, especially among middle-class retail investors who are looking for better returns than traditional fixed-yield instruments like Fixed Deposits (FDs) and Recurring Deposits (RDs).

Partly similar to equity IPOs, debt IPOs, also known as non-convertible debenture (NCD) IPOs, offer a better investment solution. They are used by companies to raise the funds they need to scale while guaranteeing non-market returns for investors.

How Are Debt IPOs and Equity IPOs Different?

One of the main differences between an equity IPO and a debt IPO (known as an NCD IPO) is that the latter ensures that the investor remains a lender and does not become a shareholder of the company. . This entitles him to recoup his investment, plus interest, on the stipulated date, regardless of the company’s stock market performance.

For retail investors looking to protect their portfolio against high market risk, while guaranteeing better returns than FDs and RDs, a debt IPO serves as a fixed-term instrument with guaranteed returns. at predetermined rates.

This makes debt IPOs an ideal choice for goal-based investing. Unlike equity IPOs, they allow investors, including seniors, to invest their funds in alignment with strategic financial management.

This is a major differentiator, as global volatility and an unpredictable trading environment continue to threaten companies, stock performance and IPO returns. It is therefore understandable that small to medium-sized portfolio investors are eager to seek out better investment alternatives.

Risk factor assessment

For investing in equity-linked IPOs, the risk is generally related to company performance as well as general stock market trends. However, in the case of debt IPOs or NCD IPOs, the risk varies depending on the type of instrument you choose.

Secured NTMs carry limited risk because they are secured by company assets or future cash flows. If the business fails to perform, the borrowed money is returned to the investors by liquidating those assets. In such a case, the first preference for the return of funds is given to the NCD holders, and not to the shareholders of the company. On the other hand, unsecured MNTs, although they offer relatively higher returns, carry more risk because there is no such guarantee of security.

Ultimately, debt IPOs are a moderate risk instrument. To make an informed investment, investors should consider the industry the company belongs to as well as past performance while doing due diligence to assess the stability and growth potential of the company.

What the future holds

The ever-increasing volume of funds raised through debt IPOs in India indicates the future potential for retail investors willing to consider medium-risk, higher-return instruments. The need of the hour, however, is for all stakeholders – companies seeking to raise capital through IPOs, investors or lenders, investment advisers and facilitators – to increase the level of awareness, information and access to these investment options.

Unfortunately, the majority of retail investors are unaware of the opportunities offered by debt investments and the appropriate channels through which they can invest in NCDs. Greater awareness of the digital channels available today to buy, track and sell NTMs is crucial. Unlike traditional offline channels, which make investing in NCDs a complex affair, especially for older people, online platforms offer high convenience, transparency and decision-making power.

Debt IPOs or NCD IPOs are not just an asset class for portfolio diversification, they can be so much more. They can be exploited as instruments to achieve financial goals, provided that the investment is based on an in-depth study of the company raising funds.

The author Abhijit Roy is the CEO and co-founder of Golden Pi. The opinions expressed are personal.


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