Here's how NCDs are a better investment than FD and CFD

  • Posted By :
  • Friday Sep 28, 2018

When it comes to new investors, Fixed Deposits (FDs) are often considered the safest option for your money. It not only protects your capital but also ensures a stable growth until maturity. But given the fact that fixed deposits are not offering any attractive rates right now, Non-Convertible Debentures (NCDs) could be a better alternative to invest your money. Let’s know more about these debt instruments in detail and how they can be a better investment option for you.

Comparing NCDs with FD and CFD
Before we compare the three, let’s first know the basics of FD and CFD

Basics of NCD
Let’s start by understanding what is NCD?
Non-Convertible Debentures are debt instruments that a company issues to raise money for their business. The period of these instruments is fixed and unlike convertible debentures, NCDs cannot be converted into equity shares at a future date. When you buy equity shares of a company, you become a stakeholder of that company. But in the case of NCDs, you are only a lender who receives a fixed interest on your investment.

How to Invest in NCD?

You should consider two main factors before investing in NCDs. First is your tax bracket and the second is your risk appetite. If you are someone who falls in the lower tax bracket, NCDs can become a more profitable option for you. At 9% coupon rate, the post-tax return works out to 8.1%, 7.2% and 6.3% for those in the 10%, 20% and 30% tax bracket respectively. Also, for senior citizens, there is an additional 0.25% higher return. However, it is important to ascertain the credit ratings of the company, before investing in one that offers a higher yield.

What is FD?
Fixed Deposits are long-term investments that offer higher interest rates as compared to a normal savings account. The average one year FD rates are currently at around 6.65% while the five-year deposit currently fetches around 6.75%. The rates vary depending on different banks. 

What is CFD?
Corporate Fixed Deposit or Company Fixed Deposit (CFD) is a form of fixed deposit issued by NBFCs. Companies that need to raise finance in a relatively short period of time use such deposits. Credit rating agencies like ICRA and CRISIL are responsible for rating these deposits based on the company’s credibility.

NCDs v/s FDs

NCDs - Non-Convertible Debentures FDs - Fixed Deposits
Generally offer 200-250 basis point higher returns than FDs. More risk, the higher is the return Comparatively lower returns than NCDs
Rate can either be fixed or be floating depending upon the company's credit rating and the credit rating of the bond  Interest rate for the investor is fixed regardless of any fluctuations in the market interest rate

NCDs v/s CFDs

NCDs - Non-Convertible Debentures CFDs - Corporate Fixed Deposit
Can be secured as well as unsecured Always unsecured against the assets of the corporate
Trade/transactions can be allowed on stock exchanges Early withdrawal is next to impossible and depends solely on the discretion of the company
No deduction of TDS Require TDS deductions if interest earned is more than Rs. 10,000

Investing in NCDs can prove to be more lucrative than FDs and CFDs.

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