Risks of Investing in Unsecured Debentures:
Regardless of what stage of life we are in, we all desire our investments to grow secure and reliable, isn't it? So, let’s talk about something important - the risks of investing in unsecured debentures and why secured debentures are such a great choice.
First, what’s a debenture?
Think of a debenture as funds that you lend to a company. They need money, so they borrow it from people like you by promising to pay interest at intervals and return your money in the future.
What about unsecured debentures?
Unsecured debentures are similar to lending money without demanding anything in return as a fall back. So, if the company is not able to repay you, you do not have anything to ask for - no property, no assets, anything. This is why the risks of investing in unsecured debentures are higher. Because this is unsafe, the company pays more interest to attract investors.
So, what’s a secured debenture then?
Secured debentures are safer since the company is putting something of value - like land, buildings, or machinery - up as collateral. If they don't pay you back, you get to keep those assets. It's having a safety net for your funds.
Why are unsecured debentures riskier?
Here are the main risks of investing in unsecured debentures:
• You may lose all your money if the company is not able to repay, since there's no collateral.
• If the company is bankrupt, individuals who lent money with collateral receive payments f irst, and you may receive nothing.
• Interest payments may be delayed or omitted if the company is under trouble.
• The safety of your money relies significantly on whether the company is financially healthy.
• Economic or industry issues can complicate matters for the company to return your money.
Because of all this risk, unsecured debentures usually pay you higher interest to make it worth your while.
Why are secured debentures safer?
When you have secured debentures, your investment is supported by assets of value. In case the company fails, you can get your money back through the sale of those assets. This added protection gives you confidence and helps prevent you from facing the risks of investing in unsecured debenture.
Here's an actual example:
Look at the debentures that are secured by GHL - you get a 24% return annually, and your money has three layers of security behind it:
• Your Demat account is credited with the debenture directly
• The assets are mortgaged and secured by a trustee
• Charge created with MCA protection
When we have opportunities like this, we should definitely take them, right?
