When you as an investor choose an investment option, it is always better to compare it with other available options, isn’t it? You must shop around to see which investment vehicle can give you higher returns at the minimum possible risk. While you may be familiar with equity investment – directly or through the mutual fund route; and traditional investments like bank FDs, there are two other investment vehicles for stable returns at lower risk. They are Non-convertible debentures and Corporate FDs.
What are Non-convertible debentures?
Non-convertible debentures are those debt instruments that you cannot ever convert into equity investment. These instruments have a fixed date for maturity. The interest is either paid along with the amount invested (principal) on the date of maturity, i.e. cumulative, or paid on a monthly, quarterly or annual basis, i.e. non-cumulative.
Non-convertible debentures help investors with –
- Higher returns:
NCDs provide a higher interest rate on your investment compared to other debt instruments. On this instrument, in the present interest rate scenario, you can earn an interest of 7% to 9% depending upon the tenure and credit profile of the issuer, provided it is held till maturity.
They have a tenure ranging from 3 to 10 years. However, these instruments are liquid as they are traded in the secondary market on stock exchanges.
- Low-risk factor:
These instruments are secured against the assets of the company. So, the risk factor in this investment is pretty low.
- Tax benefits:
Though interest on NCDs whether received periodically or cumulatively is taxed under head ‘Income from other sources’ at applicable slab rates. Interest is not subject to tax deduction at source if NCDs are held in dematerialised form and are listed on a stock exchange.
Profit on sale/ redemption of NCDs has to be offered to tax as ‘Capital Gains’. For a listed NCD, you will be able to enjoy tax benefits like you have to pay short-term capital gain tax if you sell the instrument within one year of purchase. While if you sell it post one year, the long-term capital gain tax will be levied @20% with indexation benefit. For an unlisted NCD, the same will be 36 months.
Whether you are looking for a short term or long term investment option, this investment option can be lucrative, especially if you are in the highest tax bracket.
However, there is Interest rate riskinvolved in NCDs. These instruments are traded on the stock exchanges, and if you sell them before maturity, the instrument’s price will be determined by the prevailing interest rate. However, it will work like a corporate FD if you hold it till maturity.
Additional Read: Things to Know About Corporate Fixed Deposits
What are Corporate Fixed Deposits?
These are term deposits like bank fixed deposits but these are offered by Non-banking financial company and other organizations. They offer higher interest rates compared to bank FDs. You can expect an interest rate of around 5.5% to 9% depending on the tenure of the deposit and the credit quality of the company. The maturity period varies from a few months to even five to eight years.
Pros and Cons
Corporate FDs are best suited for investors with a short investment horizon or in the lower tax bracket. The reason is higher returns as compared to the bank FDs. Then these instruments are pretty flexible as well – there are multiple tenures. They offer lower risk as well if you go for the higher-rated corporate FDs. The liquidity is higher than a Bank FD as the lock-in period is lesser but not as liquid as an NCD.
Compared to Bank FDs, corporate FDs do not come under the Deposit Insurance and Credit Guarantee Corporation (DICGC). Credit Ratings are also not mandatory for these instruments, which are for NCDs. So, the risk is a bit higher than NCDs.
Additional Read: Corporate Fixed Deposits: How Do You Choose the Right One?
So, both NCDs and Corporate FDs have their pros and cons. While NCDs provide a higher return than Corporate FDs and are also more liquid, Corporate FDs do not involve market risk or interest rate fluctuations. So, if you are looking for debt instruments with regular income and tax benefits, then NCDs can be a good option. While investors looking for longer-term deposits without any market risk can go for Corporate FDs. Whether you have long term or short term goals to meet at Tata Capital Wealth, our Relationship managers and our investment product specialist will be there to assist you all the way through.