Why Non-Convertible Debentures are better than FD, PPF & MF

When it comes to growing wealth, Indian investors often gravitate toward Fixed Deposits (FDs), Public Provident Funds (PPF), and Mutual Funds (MFs). However, Non-Convertible Debentures (NCDs) are emerging as a compelling alternative for those seeking steady returns and better liquidity. Let's explore why NCDs might be a better choice.

What are NCDs?

Non-Convertible Debentures (NCDs) are debt instruments issued by companies to raise capital. Unlike convertible debentures, they cannot be converted into equity shares but offer attractive interest rates, making them a preferred investment for risk-conscious investors.

Advantages of NCDs over traditional investments

Let’s break down the unique benefits NCDs offer compared to other popular investment avenues.

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1. Higher Returns

NCDs typically offer interest rates ranging from 8% to 12%, which are significantly higher than FDs (5%-7%) and the PPF rate (currently at 7.1%). This makes them a lucrative option for those seeking better fixed income returns.

2. Regular Income Options

Unlike PPF, which locks in your funds for 15 years, NCDs provide periodic interest payouts (monthly, quarterly, or annually). This makes them suitable for investors who rely on regular income, such as retirees.

3. Liquidity

NCDs are listed on stock exchanges, allowing investors to buy or sell them before maturity. In contrast, FDs and PPF are relatively illiquid, with withdrawal restrictions and penalties.

4. Tax Efficiency

While the interest earned on FDs and NCDs is taxable, capital gains from listed NCDs held for more than a year are taxed at a lower rate. MFs may offer similar tax benefits, but NCDs provide assured returns, unlike the market-dependent nature of MFs.

5. Lower Risk Compared to MFs

NCDs are less volatile than equity or debt mutual funds since they come with fixed returns. Investors can also choose NCDs with higher credit ratings, minimizing default risks.

How do NCDs compare?

For a clearer picture, here’s a side-by-side comparison of NCDs with FDs, PPFs, and MFs.

When to choose NCDs?

NCDs might not be the ideal choice for everyone, so here’s when they are most beneficial.

• For Steady Returns: If you’re looking for predictable returns higher than FDs or PPF.
• For Short to Medium-Term Goals: NCDs offer flexible tenures ranging from 1 to 10 years.
• For Liquidity: If you want the flexibility to exit your investment anytime by trading in the secondary market.

Key Considerations

Before investing in NCDs, consider these important factors to ensure a sound financial decision.

• Credit Ratings: Opt for NCDs with high ratings (e.g., AAA or AA) from agencies like CRISIL or ICRA or India Ratings.
• Issuer's Financial Health: Research the issuing company’s track record and financial stability.
• Market Risks: Be aware of interest rate fluctuations that might affect resale prices.

Conclusion

As you weigh your investment options, it’s crucial to understand how NCDs stand out in the mix.

NCDs bridge the gap between the safety of FDs and the growth potential of mutual funds, offering a balanced approach to wealth creation. While they may not replace the security of PPF for long-term goals, they shine as a flexible and high-yielding option for diversified portfolios.

If you're ready to explore NCDs, consult a financial advisor to ensure they align with your risk tolerance and investment goals.