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NCDs Vs Bank Deposits: Which is better?


NCDs Vs Bank Deposits: Which is better?
Non convertible debentures are debt instruments issued by company to raise capital. There are two types of NCDs-secured and unsecured.

A secured NCD is backed by the assets of the company and if it fails to pay, the investor who is holding is paid by liquidation of these assets. compares NCDs and bank fixed deposits

NCD yields of different companies

Manappuram Finance Limited

Face value: Rs 1000
Coupon rate: 12%
Yield to maturity: 27.12%
Redemption date: 12/10/12
Interest paid is cumulative and compounded annually
Ratings: "CARE AA-" by CARE and "BWR AA-" by Brickwork

Shriram City Union Finance Limited

Face value: Rs 1000
Coupon rate: 11.50%
Yield to maturity: 16.90%
Redemption date: 25-08-14
Interest due date: 1/04/012
Ratings: "CRISIL AA-/Stable" from CRISIL "CARE AA" from CARE

Bank FD rates from 1-3 years


Tenure: 1-3 years
Interest rates 7.00% - 8.75%


Tenure:1-3 years
Interest rates: 7.50% - 8.50%

It's clear from the above, that NCD yields are much higher. Below is a quick synopsis, which will show that interest rates on NCDs are higher, but they are relatively risky as compared to bank deposits.

Interest rates: Interest rates offered by NCDs are always higher than bank FD. NCDs will be a good bet specially in falling interest rate regime.

Risk: Risk aspect is higher in NCDs when compared to FD. So, unsecured NCDs offer higher rates because of the risk factor as they have no underlying assets in case of bankruptcy.

Incase of a secured NCD they are backed by certain assets that will be sold off to pay the NCD holders in case of default.
However, bank FDs are secured upto one lakh as per RBI guidelines. PSU banks being government owned are almost fuly secure.


Liquidity: NCDs are relatively less liquid than bank FDs. NCds are traded on the exchanges, but the volumes are poor. So, if one wants to sell a large quantity he may be unable to do so. Bank FDs are extremely liquid and there is no other asset that is more liquid than a bank FD.

However, bank FDs are also liquid and can be withdrawn before maturity with penal charges.

Tax: Unlike FDs, TDS is not deducted in NCDs, if they are held in demat form. Returns on NCDs are considered as income under Income Tax act and so is the case for Bank FDs.

In case if you sell your debenture within one year it will be taxed under short term capital gains and if sold after one year and before the maturity date, come under long term capital gains.

Read more about: ncd fd interest rates
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