NCDs offer higher returns than bank FDs, but know these things before investing

By: | Published: January 2, 2019 11:59 AM

These are for investors who want to go for the higher interest rate-bearing instruments, at a time when interest rates on bank deposits are no longer attractive.

These are for investors who want to go for the higher interest rate-bearing instruments, at a time when interest rates on bank deposits are no longer attractive.

Non-convertible debentures (NCDs) are issued by companies looking to raise funds. These are for investors who want to go for the higher interest rate-bearing instruments, at a time when interest rates on bank deposits are no longer attractive. Non-convertible debentures let you lock into a higher interest rate for longer periods, in a falling interest rate scenario.

If you haven’t invested in NCDs yet, not to worry. There are many NCDs in the pipeline with attractive interest rates. M&M Financial Services will issue their NCDs on January 7 and will be paying interest of 9.5 per cent, whereas Shriram Transport Finance is to open their issue of NCDs on January 4 and will be paying 9.7 per cent interest.

Here is a quick guide to NCDs:

What are NCDs? When a company wants to raise money from the public it issues debentures. Some of these are convertible debentures ad they can be converted to equity share at the time of maturity. Others such as NCDs or non-convertible debentures, as the name suggests, cannot be converted into equity shares at the time of maturity. These typically offer higher interest rates than bank deposits and are like company fixed deposits.

Type of NCDs: Two types of NCDs are offered – secured and unsecured. Secured NCDs have control over the assets of the issuing company, whereas unsecured NCDs do not get any backing if the company defaults. Hence secured NCDs are preferred over unsecured NCDs at the time of a financial breakdown or liquidation. However, as the unsecured NCDs are riskier, they offer a higher rate of interest than the secured ones.

Interest Rates offered: NCDs offer high rates to investors, in a high-interest rate scenario. In the last few years, the average interest rates have been around 8 to 12 per cent, most of which are secured NCDs. You can also choose from various options for interest payout such as monthly, quarterly, half-yearly or annually, though most NCDs offer an annual and cumulative payout.

Tax implications: Gains from NCDs are taxed differently from interest on bank deposits, depending on their term. When sold on stock exchanges, short-term capital gains of NCDs sold before one year are taxed as per the income slab of the individual. Any sale arising by selling NCDs after one year and before maturity is taxable as long-term capital gain.

NCDs VS FDs: Currently, SBI offers 6.75 per cent interest on its five-year fixed deposit whereas NCDs offered a return of 8-12 per cent depending on the lock-in period. By allowing investors with the option to lock into better interest rates for longer periods, NCDs offer the advantage of overbank deposits. Most investors go in for FDs mostly because of the easier access and relatively ‘on demand’ liquidity they provide. NCDs are listed on the BSE and NSE, though they also provide liquidity over a longer tenure.

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