NCDs Or Company FDs: Who trumps who? | srei

NCDs Or Company FDs: Who trumps who?

The number of finance companies offering NCDs or non-convertible debentures is increasing and is one way investors can achieve diversification in their debt portfolio. It is also interesting to note that along with NCD’s these companies also provide the option to invest in their Fixed Deposits. So under the terms and conditions according to which they operate, which would be the best option for investors in order to fulfill their goals of investment and increase their financial yield?

These two types of investments are similar in the sense that they offer higher returns as compared to bank deposits. However investors should be aware about the important differences and aspects that they operate under, one of which is liquidity. NCD’s unlike company FD’s are traded on stock exchanges and hence there is a route for premature exits. Thus NCD’s are also subject to constant market interest rate fluctuations. As far as company FD’s are considered the investors can withdraw the money before maturity by accepting a 1% deduction in the promised rate. NCD’s are more secure as compared to Company FD’s with the degree of security varying across companies as well as across different issues in the same company. Company FD’s are unsecured with no chance of a claim if the company fails to repay them.  NCD’s are investments in the 1-3 year time horizon whereas Company FD’s are in the 3-5 year time horizon.

As far as credit ratings go, corporate FD’s do not require any kind of rating. Even if companies get the issues rated declaring the ratings is not mandatory. The main advantage of a rating being available is that the investor is aware about the risk level involved in a particular issue. As NCD’s are issued on the stock exchange they are not subject to Tax Deducted at Source (TDS). A company FD offering 12.5 percent gives more post-tax returns than a bank FD offering 9.5 percent. High net-worth investors who are ready, willing and able to take risks will find company FD’s well suited to their investment requirements. The interest earned from the NCD depends upon the investor's income tax slab. Proceeds from the sale of NCD’s before maturity are also taxed under the category of short term capital gains.
Repayment of credit risk is one of the biggest risks associated with company FD’s and there are a few precautions investors need to take. Avoiding companies with high interest rates is the first thing investors need to do as companies are legally not allowed to offer more than 12.5 percent a year. Investors should also check the financial health of the company they are investing in by checking the latest audited balance sheets. Investments in NCDs are also not entirely risk free.

Prospective investors should carefully consider the risks and uncertainties in addition to other information before making any investment decision relating to the issue since liquidating investments in NCDs could be difficult.