Bank FD or NCDs where should you keep your money

Do you Invest in Bank FDs? Then why not in NCDs?

India is a country of savers. On average, Indians save a lot more than the other countries. The majority of this saved money kept in Bank Fixed Deposits (FDs) for the safety and security it provides.

But what if there is a better alternative to the FD, which give the same safety and security along with higher interest rates? You might be thinking about what I am talking about. But yes, there exists such an alternative to FDs. It is called as NCDs (Non-Convertible Debentures).

NCDs are issued by public companies registered on NSE/BSE and also regulated by SEBI. Companies use the money raised from these NCDs for Capex requirements, onward lending, other corporate purposes, etc.

NCDs also enter the market through IPO way. A company raising funds through NCD will give detailed advertisements with the objective of the issue, interest rate, frequency of payment, etc. Based upon the company’s financial position, rating agencies like CRISIL, CARE, etc. will give appropriate ratings to such NCD IPOs. It is common to understand that higher ratings mean the company is financially healthy. Thus their NCDs will be much safer to invest. But as you know, high-risk, high reward! Hence, companies with lower ratings give comparatively higher interest rates on NCDs than financially strong good-rated companies.

Types of NCDs:

1. Secured NCDs:

Assets of the issuing company back these NCDs. In the event of the company not able to pay the interest, then the investors can get their money back after the liquidation of company assets.

• Unsecured NCDs:

As the name suggests, these NCDs are not backed by company assets. If a company fails to pay the interest on time, then investors only have the option of wait & watch. Part offered on such NCDs is usually higher than the secured ones. Remember, high-risk, high reward!

Advantages of investing in NCDs:

• NCDs offer interest rates in the bracket of 8% to 12%, which are significantly higher than current bank FD rates (SBI 1 year FD interest->5.1%).
• NCDs do have the option of monthly, quarterly, annual, and cumulative payout options.
• You can exit NCDs anytime by selling them in the secondary market. Also, you may get the currently traded NCDs in secondary markets at lower prices than their IPO prices.
• Though NCD interest is taxable, TDS won’t be deducted directly.

Things to look for before investing in NCDs:

1. Don’t invest just by seeing the interest rates. Do check the ratings for the issue, the company’s one-time NCD payments, and how the company is planning to use the raised money.
2. Don’t invest your entire money in NCDs of companies belonging to a specific sector (NBFCs, power, etc.)
3. Don’t take the liquidity of your money invested in NCDs for granted. Secondary market rates of NCDs vary on multiple parameters. You won’t always get the optimal price for your NCDs in the secondary market.

You can check about latest & past NCD issues here. So, Happy Investing!

Regards,
StockTradingF&O team

Disclaimer: The views and investment tips expressed by investment experts on Stocktradingfno.com are for educational purposes only. Before taking any investment decisions, consult with your financial advisors.