NCD Comparison

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Comparison of NCD with Bank FD, Corporate FD and Mutual Funds. Learn about Secured vs Unsecured NCDs.

Content:

NCD vs IPO (NCD vs Equity)
NCD vs FD
NCD vs Corporate FD
NCD vs Debt Mutual Fund
NCD vs Mutual Funds
Secured vs Unsecured NCDs
NCD vs Debentures
NCD vs Bonds

NCDs are fixed-income instruments that are generally considered to be a safe investment with an option to earn regular income. Investment in any instrument generally depends on the main factors:

Risk-taking capacity.
Amount of investment.
Holding capacity.
Investment goal.

In this chapter, we will have a look at other investment options as compared with NCD that can help investors make better investment decisions.

1. NCD vs IPO (NCD vs Equity)

The primary difference between an IPO and an NCD is that an IPO is a first-time public offering of shares or equity, whereas an NCD is a public offering of debentures or bonds. Ideally, the first-time offering of NCD also is an IPO but known as an NCD IPO. When only the ‘IPO’ word is used it generally refers to the public issuance of shares

For a better understanding, let’s discuss the difference between NCDs and IPOs:

NCD vs Equity IPO

	IPO	NCD
Full Form	Initial Public Offerings (restricted to the issuance of equity shares for this context)	Non-Convertible Debentures
Definition	IPO stands for Initial Public Offering. In an IPO, a company offers it’s shares to the general public for the very first time through the primary stock market.	The public issuance of debt securities by a company, such as bonds or debentures, is known as an NCD issue or NCD IPO.
Ownership	The shareholders (in the case of share allotment in IPO) become the owners of the company to the extent of shareholding in the company.	The ownership of the company does not get transferred to the NCD holder.
Investment Tenor	There is no maturity period in an IPO. Investors can sell the shares whenever they want after the listing.	There is maturity for NCDs. Before maturity, investors can sell their debentures (if NCDs are listed or a put option is applied), but for good returns, they should wait until the maturity of the NCDs.
Interest Rate	There is no concept of interest rate in IPOs.	For the money raised by the company through NCD, they pay a particular interest, and on maturity, the investors receive the principal and interest amounts.
Tax implications	The profits made from the sell of IPO shares on the listing are subject to long-term and short-term capital gains as applicable.	Interest income from NCDs will be subjected to tax at normal rates by including it in ‘Income from other sources’.

2. NCD vs FD

Investors frequently struggle with the decision of whether to invest in fixed deposits or NCDs. The comparison of NCD vs fixed deposit helps resolve this challenge. Following are some significant differences between NCDs and FDs for understanding and seeking a better opportunity:

NCD vs Bank FD

	NCD	FD
Full Form	Non-Convertible Debentures	Fixed Deposit
Investment Tenor	NCDs are long term fixed income instrument ranging from 1 year to 10 years	FDs are short term to medium term fixed income instruments ranging from 3 months to 5 years
Interest Rate	NCDs offer a higher rate of interests compared to FDs.	FD interest rates are comparatively lower than NCDs.
Tax implications	Interest on NCD is treated as other income and taxed as per investor tax slab	Interest on FD is also treated as other income and taxed as per investor tax slab.
Trading	Investors can trade in NCDs, provided they are listed.	There is no trading of FDs.
Premature/Early Exit	NCDs cannot be withdrawn before maturity. One can sell the listed NCD and make an exit. However, the NCD remains intact. The NCD holder gets changed but the NCD continues unless there is a call option attached to an NCD.	Investors can exit from an FD at any point of time by paying a small penalty.
Liquidity	Lesser liquidity as withdrawal is not possible and NCD secondary market is not so liquid.	Highly liquid.
Minimum Investment	NCD investments require a minimum investment of Rs. 10,000.	The minimum FD investment amount varies from bank to bank. It is generally Rs. 1,000 or Rs. 5,000 and in some banks Rs. 10,000.
Degree of safety	NCDs are rated by credit agencies indicating the degree of safety and risk attached to an NCD. A good rating of AA and above indicates higher degree of safety. The credit ratings indicate the level of assurance of payment but no guarantee.	FDs are covered up to a maximum of Rs 5,00,000 for both principal and interest amount under DICGC for an investor including his savings amount. (Deposit Insurance and Credit Guarantee Corporation)

3. NCD vs Corporate FD

Corporate fixed deposits (Corporate FDs) and non-convertible debentures (NCDs) are two fixed-income investment options that companies offer to the public to raise money. While NCDs and corporate FDs have certain parallels, there are also important differences.

NCD vs Corporate FD

	NCD	Corporate FD
Who issues?	NCDs can be issued by public or private companies.	Corporate FDs are generally issued by non-banking financial companies (NBFCs) and Housing Finance Companies.
Credit Rating	Mandatory to have credit ratings	May not have credit ratings.
Risk	Less risky as compared to Corporate FDs as these are rated by credit agencies which can indicate the level of risk. Moreover, most of the times NCDs issued are secured.	Corporate FDs are not backed by any collateral hence little risky.
Liquidity	More liquid than Corporate FDs. Can be traded before maturity.	Not tradable. Cannot be easily withdrawn before maturity.
Call-put option	NCD may have call options or early redemption options, allowing the issuer to repay the debt before the maturity.	There’s no call or put option in Corporate FDs.
Early withdrawal	Possible in the case of listed NCD wherein the investor can sell off his NCD and make an exit at the available price.	Difficult and tedious process. The early withdrawal may be permitted post a certain lock-in period (different from corporate to corporate). Prematurity, if allowed, is done by charging a penalty.
Investor Protection	NCDs are regulated by the SEBI when they are listed on stock exchanges.	Corporate FDs fall under the purview of Companies Act, and the issuer is regulated by the Ministry Corporate Affairs.
Safety	Secured NCDs are safer.	Corporate FDs are not covered under DICGC unlike bank FDs hence little risk.
Taxability	TDS is not applicable.Interest from NCD is charged under the head Income from other sources. In the case of sell of NCD, short-term and long-term capital gains tax is levied as applicable.	TDS is applicable in the case of corporate FDs.

4. NCD vs Debt Mutual Fund

NCDs (Non-Convertible Debentures) and debt mutual funds are investments in fixed-income instruments. Though the underlying in both of them is fixed income securities, there are certain differences in both asset classes. Let us have a look at some of the key differences below:

NCD vs Debt Mutual Fund

	NCD	Debt Mutual Fund
Meaning	Fixed-Income securities issued by public or private companies to raise funds from the public in return for a fixed interest rate.	Mutual Funds that allocate funds to debt instruments like corporate bonds, government bonds, commercial papers etc. are known as debt mutual funds.
Diversification	NCDs are individual instruments, and investing in them exposes the investor to the credit risk of the issuing company.	Debt mutual funds, on the other hand, provide diversification as they invest in a variety of debt instruments issued by different entities such as government securities, corporate bonds, money market instruments, etc.
Liquidity	NCDs are typically less liquid than debt mutual funds.	Debt mutual funds can be redeemed with the fund house at the prevailing net asset value (NAV) on any business day.
Risk and Credit Rating	NCDs carry issuer-specific credit risk, meaning the investor is exposed to the creditworthiness of the issuing company. Higher-yielding NCDs may carry higher credit risk.	Debt mutual funds also carry credit risk, but the risk is spread across multiple issuers.
Management and Professional Expertise	NCDs require investors to conduct their own analysis of the issuing company’s creditworthiness.	Debt mutual funds are managed by professional fund managers who have expertise in analyzing and managing debt securities
Taxation	The interest income earned from NCDs is subject to tax as per the individual’s income tax slab rate.	Debt mutual funds held for more than three years qualify for long-term capital gains tax with indexation benefits, while those held for three years or less are subject to short-term capital gains tax as per the individual’s income tax slab rate.
Accessibility	Online NCD application facility is not available to all brokers.	Debt Mutual funds can be easily applied online through fund houses.

5. NCD vs Mutual Funds

Non-convertible debentures are debt instruments and mutual funds is a diversified investment across shares, bonds or a mixture of both. The following are the main differences between NCDs and Mutual Funds.

NCD vs Mutual Fund

	NCDs	Mutual Funds
Structure	Fixed-income instruments issued by corporations.	Pool of funds invested in diversified portfolio of securities (stocks, bonds, or a mix of both)
Risk	Relatively lower risk compared to equities.	Risk varies based on underlying assets (equity, debt, etc.).
Returns	Fixed interest rates over a specified period. Typically, higher than bank fixed deposits.	Potential for higher returns over the long term; vary based on asset class.
Liquidity	Generally, have a fixed tenor; liquidity may be lower, especially if not actively traded.	Offers high liquidity; investors can buy/sell units at Net Asset Value (NAV).
Taxation	Interest income taxable as per investor’s income tax slab.	Equity mutual funds held for over one year are taxed at a flat rate of 10% on gains exceeding ₹1 lakh in a financial year (as of current Indian tax laws).

6. Secured vs Unsecured NCDs

The main difference between secured and unsecured NCDs is that secured NCDs are safer and more reliable in terms of payment than unsecured NCDs. The following are the main differences between Secured NCD and Unsecured NCD.

Secured vs Unsecured NCDs

	Secured NCD	Unsecured NCD
Meaning	Secured NCDs have some assurance of repayment. They are safer and more reliable because secured NCDs are supported by company assets.	Unsecured NCDs come with no guarantees of payment if the company fails.
Interest Rate	NCD interest rates are lower for secured NCDs as compared to unsecured.	NCD interest rates are higher for unsecured NCDs.
Risk	Secured NCDs are safer and more reliable than unsecured NCDs.	Unsecured NCDs have a comparatively higher risk.

7. NCD vs Debentures

NCDs stand for non-convertible debentures. There are many different types of debentures. Therefore, one can say that NCDs are a type of debenture.

The following are the different types of debentures:

Registered vs Bearer Debentures. Registered debentures are the debentures registered in the name of the debenture holder. The person whose name is recorded in the company records for the said debenture is the owner of those debentures. Whereas, the bearer debentures are not registered in any specific name in company records. Any person in possession of the bearer debenture is the owner of the debenture.
Redeemable vs Irredeemable Debentures. Redeemable debentures clearly spell out the exact terms and date by which the issuer of the bond must repay their debt in full. Irredeemable (non-redeemable) debentures, on the other hand, do not hold the issuer liable to repay in its lifetime.
Convertible vs non-convertible Debentures. Convertible debentures are debt instruments that can convert into equity shares of the issuing corporation after a specific period. Nonconvertible debentures are traditional debentures that cannot be converted into equity of the issuing corporation. These have a higher interest rate.

8. NCD vs Bonds

NCDs and bonds are both considered to be fairly safe long term financial instruments. Though they both are quite similar in nature, below are some of the key differences.

NCD vs Bonds

	NCDs	Bonds
Issuing body	Public or private companies.	Usually, government or financial organizations.
Investment Type	NCDs can be secured or unsecured. Choosing a credible organization when investing in debentures is essential.	Secured with collateral. To a certain extent, bonds are secured.
Conversion possibility	Cannot be converted to equity shares.	Some convertible bonds can be converted to company stocks.
Tenure	Generally lesser than bonds, but may vary between 3 and 20 years depending on the issuing company.	Long term investments ranging from 10 to 30 years. This depends on the issuing company.
Risk	Riskier compared to bonds.	Generally backed by collateral, hence less risky.

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Frequently Asked Questions

1. Is NCD better than FD?

NCDs typically offer higher interest rates compared to FDs. However, the interest rates can vary based on the credit rating of the issuer and prevailing market conditions. FDs generally provide a fixed interest rate throughout the investment period.

NCDs are rated by credit rating agencies that help investors identify whether or not to invest in NCDs. FDs are not rated by credit agencies but covered under DICGC insurance for an amount of up to Rs 5 lakhs (including all other bank deposits)Discuss this question

2. Which is better, NCD or FD?

FDs typically have a fixed commitment period, and early withdrawal may be subject to penalties or lower interest rates. NCDs generally offer higher interest rates as they can be fixed or floating, while FDs have a fixed interest rate for the entire term.

Difference between NCD and FD

Aspect	Fixed Deposits (FDs)	Non-Convertible Debentures (NCDs)
Commitment Period	Short term to medium term.Typically have a fixed commitment period (e.g., 1 year, 3 years, 5 years)	Medium to long term.Have a specified maturity period, e.g., 1 year to 10 years.
Early Withdrawal	Early withdrawal may be subject to penalties or lower interest rates	Can be traded before maturity, if listed on a stock exchange. No penalty, trading happens at available market price.
Liquidity	More liquid than NCD. Can be withdrawn anytime subject to penalties	Less liquid than FD. Though listed NCDs can be traded, the liquidity is lower.
Interest Rates	Fixed interest rates for the entire term	Offer higher interest rates, which can be fixed or floating, depending on the terms
Regulatory Oversight	Regulated by the Reserve Bank of India (RBI) and governed by banking regulations.	Regulated by the Securities and Exchange Board of India (SEBI) and governed by securities regulations.

3. Is debt mutual fund better than fixed deposit?

Comparison between Debt Mutual Funds and Fixed Deposits

Aspect	Debt Mutual Fund	Fixed Deposit
Return Potential	Generally, offers higher potential returns compared to fixed deposits, but returns are not guaranteed and vary based on market conditions.	Offers fixed and guaranteed returns over the investment period.
Risk	Subject to market risk and fluctuations in interest rates, though generally considered lower risk compared to equity mutual funds.	Considered low risk as principal amount and returns are guaranteed.
Liquidity	Offers higher liquidity as you can redeem your investment partially or fully at any time.	Offers liquidity subject to penalties for early withdrawal before maturity.
Taxation	Taxed as per capital gains tax rules, with different tax treatments based on the holding period (short-term or long-term).	Interest earned is taxable as per income tax rules.
Diversification	Provides diversification by investing in a portfolio of debt securities across various issuers and maturities.	Offers no diversification as it involves investing a lump sum amount with a single institution.

4. What is difference between NCD and bond?

The major differences between NCDs and Bonds are as follows:

NCDs cannot be converted into shares, while bonds can be convertible or nonconvertible.
NCDs are issued by corporations or financial institutions, while bonds are issued by corporations, governments or municipalities.
The issuance of NCDs is regulated by SEBI (Securities and Exchange Board of India) while the issuance of bonds is regulated by the relevant authorities such as SEBI or RBI in India.
Bonds are less risky than NCDs as they are more secure than NCDs.

5. What is the difference between IPO and NCD?

Differences between IPO and NCD

Aspect	IPO	NCD
Type of Security	In an IPO, shares are offered to the investors for the first time.	In NCD, debentures are offered to the investors.
Investment Duration	Shares can be held for a long term or a short period. IPO shares can be sold on listing itself.	Medium to long-term investment.
Risk	Risky as it depends on the market situation. No fixed returns.	Low risk as NCDs are generally secured and is a fixed income instrument.
Maturity	Does not involve any maturity period.	Has a maturity period determined by the issuer.
Interest Payment	The issuer does not make any interest payments; investors earn/make profit by selling the shares at a better price.	Issuer pays interest to investors.
Ownership	Ownership of shares transferred to investor.	Ownership or shareholding not transferred.