How NCDs Can Offer You Better Returns Than Bank Deposits?

Updated: Thursday, February 5, 2015, 9:30 [IST]

Investors are generally wary of investing in any instrument that is difficult to understand, even if it means losing out on interest and returns. Let's given you one such instrument today; ie NCDs or Non Convertible Debentures.

How NCDs Can Offer You Better Returns Than Bank Deposits?

Non Convertible Debentures that are listed on the exchanges can offer you returns of as high as 15 per cent, which could easily beat bank returns by 4-5 per cent. It can therefore offer you a good opportunity for decent returns.

What are NCDs and Where to Buy them?

Non Convertible Debentures are a type of instrument that are offered by companies that want to raise money. These NCDs are debt instruments that carry a fixed interest rate. Companies like Shriram Transport, Muthoot Finance, SREI and several others have raised money through these NCDs.

Once these instruments are offered they are listed on the stock exchanges. They generally carry an interest rate of 10-13 per cent. Now, let's give you a simple example of the Manapurram Finance N6 NCD. This was launched on Jan 28, 2014 and carries an interest rate of 12.5 per cent. The current market price is Rs 1000, which means your interest rate earned is also 12.5 per cent.

You can buy the NCDs on the stock exchanges and can also sell them on the same. In case you hold them till maturity the company concerned will pay you the maturity proceeds. These NCDs are not very liquid and you can make money if you hold them till maturity. They will be held in the same manner as you hold shares and earn dividend.

Taxation of NCDs

Interest earned from NCDs has to be added to total income and tax computed accordingly. This is same as bank interest rates which are taxable. However, there is a TDS that is applicable on bank deposits, but there is no TDS on NCDs. That does not mean it is tax exempt, as you have to declare the interest income earned when filing tax returns

Here is a list of NCDs that are listed on the stock exchanges

Name of NCD	Interest Rate
Manappuram Finance Limited N6 series	12.00%
Muthoot Finance N5 series	12.00%
Shriram Transport Finance N9 series	10.25%
Shriram Transport Finance N6 series	9.75
Muthoot Finance N6 series	12.25%
Shriram City Union N2 series	11.85%

Conclusion

There can always be an element of risk when it comes to investing in NCDs. Most of the NCDs are rated by reputed credit rating agencies. Please check for these before you invest. As indicated earlier invest in NCDs only if you feel that you can hold onto them till maturity.

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