Why NCDs Are A Better Option To Invest?

Compared to company fixed deposits, NCDs offer competitive rates and are considered more secure. Read to know the key differences here to help you choose wisely!

6 Jan,2023 11:26 IST 2591 Views
Why NCDs Are A Better Option To Invest?

The most attractive investment options offer substantial returns while managing liquidity and risks. Debentures are long-term financial instruments that a company issues to the investor with the promise of paying a fixed interest rate. They are of two types: convertible and non-convertible.

What Are Non-Convertible Debentures?

Non-convertible debentures (NCDs) are debt instruments you cannot convert into equity or stock. Big companies typically issue them to raise capital without being convertible into equity. NCDs are generally not collateralised. Credit agencies' ratings and the creditworthiness of the issuing company are the only reliable sources of information for investors.

Additionally, NCDs have a fixed interest rate. Depending on the terms at the time of issue, you can get interest payments monthly, quarterly, half-yearly, or annually. However, you will get the principal and interest payments upon maturity. NCDs offer many advantages over convertible debentures, such as liquidity, low risk, and tax advantages.

But are NCD investments good opportunities? How are they different from equity or bank FDs?

NCDs Vs. Equity

The top attributes that differentiate NCDs from equities include the following.

1. Term:

NCDs are fixed-term investments, whereas equity investments are perpetual.

2. Income:

For the investment period, NCDs generate fixed income. However, dividends are not guaranteed for equity holders.

3. Return:

An NCD's face value determines the rate of return. Equity holders do not receive a fixed return, and their future value is also subject to volatility and uncertainty.

4. Capital:

At the end of NCD's investment period, investors received a full return on their capital. When equity investor sells their shares, they receive the market value.

5. Ranking:

Due to default, debt investors' claims rank higher than equity claims.

NCD Vs. FD

The difference between NCD and FD are as follows.

1. Liquidity:

You cannot sell an FD on the market, unlike an NCD. Since NCDs are listed on a stock exchange, you can sell them anytime. A bank FD, however, is also highly liquid and can be cashed before maturity with only a small penalty.

2. Safety:

NCDs are secured debt options. Corporate FDs, on the other hand, are all unsecured debt, and bank FDs are secured only to a limit of Rs 1 lakh.

3. Taxation:

Taxation for NCDs and FDs is also different. Selling the NCD before maturity can result in capital gains and interest income. NCDs, however, don't have any TDS, unlike FDs.

4. Interest Rate Risk:

Currently, most banks offer fixed deposits with a tenure of three, five, or ten years at an interest rate of four to six per cent per annum. Meanwhile, NCDs offer interest rates of up to 9% or higher over the same period.

NCDs Vs. Equity Vs. FDs - Which One Is Better?

Since NCDs are more risk-averse and liquid, they are an excellent alternative to stocks if reputable companies issue them. Between an NCD and FD, a risk-averse investor should choose FDs, while investors with a higher risk tolerance can choose NCDs after reviewing a company's reputation, financials, and rating.

However, the first step towards investing in NCDs bonds is to open a Demat and trading account. Get free trading and a Demat account from India's leading stockbroker here!

Frequently Asked Questions

Q1. Is it possible to transfer ownership of non-convertible debentures?
Ans. Yes, NCDs can be traded on the secondary market.

Q2. Can you withdraw NCD before maturity?
Ans. To raise capital, companies issue non-convertible debentures with a fixed maturity date. Maturity periods range from 90 days to 20 years. You cannot withdraw an NCD before maturity but trade it on the secondary market.

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