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FD vs NCD

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FD vs NCD

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  1. FD vs NCD: High interest rates make these NCDs more attractive than FDs

  2. Introduction • Non-convertible debentures (India) and Bank FDs are both very popular investment asset classes among Indian investors looking for fixed income options. NCD investment is nothing but a kind of a loan that is issued by a company. However, you must note that NCD cannot be converted to equity.

  3. Let’s now look at key factors that make NCDs more attractive than FDs. The highest interest rates that a bank FD can fetch will be a little more than 7% for FD with a lock-in period of 3–5 years. On the other hand, the interest rates offered by NCDs are as high as 9%. In fact, small finance banks tend to offer interest rates for a year period of 8%. This clearly makes NCDs a more attractive instrument than FDs.

  4. The other fact that you need to know about NCDs is that companies issue them generally for a minimum maturity period of 90 days, which can also go up to 10 years. Thus, with NCDs, longer the tenure, higher the interest rate offered. However, with NCDs, you must watch out for high risk companies that offer highly attractive rates to invest in their NCDs. Invest with precaution. The tenure of bank FDs on the other hand is in the range of 7 days to 10 years. As an investor, you will be provided with the right to choose your FD lock-in period from a wide range of options. That said, the interest rate does not increase with longer tenure unlike in case of NCDs.

  5. Unlike FDs you can trade listed NCDs on exchanges. This is a big benefit of investing in NCDs compared with FDs, which can obviously not be traded on a stock exchange. Many NCDs, especially those with a AAA rating are highly liquid and can be freely traded in the stock markets. Those with AA+ rating tend to be less liquid compared with the AAA rated NCDs. Further, NCDs with AA- rating obviously will be less liquid compared with AA+ rated NCDs. Bottom line is that they more liquid compared with FDs.

  6. Moreover, when you withdraw FD before maturity there is often a penalty you will need to pay. Withdrawal before tenure will not even be allowed if it’s a 5-year tax savings FD r falls under certain other classes of FDs. On the other hand, once NCDs mature, you can withdraw them. However, the fact that you can trade them on stock exchanges in the interim makes them a more lucrative option compared with FDs.

  7. To know more about investing in NCDs, give us a call on 022 28584545.

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