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Company Deposits Vs NCDs: Which Is A Better Investment?

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It's time for investors to look at instruments that offer high yields, as interest rates have fallen by almost 100 basis points or 1 per cent, over the last one year.

At the moment, the instruments that give the highest interest rate or yield is Non Convertible Debentures or NCDs and Company fixed deposits.

Company Deposits Vs NCDs: Which Is A Better Investment?
So, lets do a quick comparison of company deposits vs NCDs:
 
NCDs Company deposits
NCDs are listed on the exchange. Company deposits are not.
Interest rates can be slightly better, depending on what rate you buy the instrument. Could be slightly lower.
NCDs are rated by rating agencies Even company deposits are rated by the rating agencies.
Tenure varies from 1 year to 6 years. Can range from 1 year to 5 years.
TDS not deducted. TDS is deducted for amounts over Rs 5000.
Can be sold to another investor. Not possible in this case and the company will buy back the FD.

Which is a better investment: NCDs or company fixed deposits?

Most of the non convertible debentues that hit the markets are not from the best possible companies. On the other hand, if you see the fixed deposits offered by companies, you could have the option of choosing from the safest and the best companies.

For example, we have FDs from the likes of Mahindra Finance, HDFC, Bajaj Finance and the Kerala Government owned and backed KTDFC. These are highly rated deposits, which investors would not have hesitation in investing. In fact, they are all AAA rated company deposits, that would ensure that there is no default in timely payment of interest and principal amount.

Some of the Non Convertible Debentures are not the best. We are not saying all are bad, but, sometimes the quality is a little worrisome, though there can be instruments that are secure.

Thus, investing in a quality company fixed deposits vs NCDs remains a better proposition. NCDs can offer a better yield at times, depending on the price at which it has been bought from the markets.

 

Now, let's cite an example

Say, the Non Convertible Debeture of a particular company is at Rs 1000 face value, with a coupon rate of 10 per cent.

If the NCD lists and you can get the same at Rs 950, your yield is likely to go up to as high as 10.5 per cent. This would make the NCDs a good pick.

One other advantage of this instruemnt would also be the fact that they are better in terms of liquidity. Company fixed deposits have to be sent to the company in case of urgent requirement of funds. This means it could take sometime before the money is received.

GoodReturns.in

NCDs Company deposits
NCDs are listed on the exchange. Company deposits are not.
Interest rates can be slightly better, depending on what rate you buy the instrument. Could be slightly lower.
NCDs are rates by rating agencies Even company deposits are rated by the rating agencies.
Tenure varies from 1 year to 6 years. Can range from 1 year to 5 years.
TDS not deducted. TDS is deducted for amounts over Rs 5000.
Can be sold to another investor. Not possible in this case and the company will buy back the FD.

Read more about: company deposits ncds
Story first published: Wednesday, December 16, 2015, 8:46 [IST]
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