What are NCDs in India?

Non-Convertible Debentures (NCDs) are fixed-income debt instruments issued by companies to raise funds for a specified period.

Unlike convertible debentures, NCDs cannot be converted into equity shares.

Why Do NCDs Offer High Returns?

Higher Risk Premium: Compared to traditional fixed deposits, NCDs carry slightly higher risks, leading to better returns.

Credit Ratings: Companies with lower credit ratings often offer higher interest to attract investors.

Market Dynamics: Issuers compete to provide attractive rates to secure funding.

Who Issues NCDs in India?

Non-Banking Financial Companies (NBFCs): For example, HDFC, Bajaj Finance, Shriram Finance, Indostar, etc.

Corporates: Manufacturing firms, real estate companies, Finance Companies, etc.

Government-Linked Entities: Public-sector companies issue NCDs for infrastructure projects.

NCDs vs. Corporate Fixed Deposits(FDs)

Liquidity: NCDs can be traded on stock exchanges, while corporate FDs are locked for a fixed term.

Returns: NCDs typically offer higher returns than corporate FDs.

Credit Risk: Both are subject to the issuing company’s financial health, but corporate FDs may have early withdrawal penalties.

Investing in NCDs vs. Bank/Post Office Fixed Deposits (FDs)

Advantages of NCDs:

Higher Returns: NCDs offer better returns than most bank/post office FDs.

Liquidity: Easily tradable in secondary markets, providing exit options. The can be easily linked to the demat account while making an application.

Tax Efficiency: Tax benefits for long-term capital gains, unlike FDs.

Disadvantages of NCDs:

Credit Risk: Bank and post office FDs are backed by the government (up to ₹5 lakh), whereas NCDs depend on the issuer’s solvency.

Market Risks: Secondary market prices fluctuate based on interest rates and demand.

No Premature Redemption: Unlike FDs, NCDs typically do not allow early withdrawals.

Final Verdict:

NCDs are suitable for investors seeking higher returns but willing to accept moderate risk.

Diversify your investments to balance returns and safety of your capital.