Should you invest in NCD?

The NCDs carry an investment term of five to ten years, while the interest rates are in the range of 9.30%-9.50%, which are 100-150 bps points higher than the rates offered on bank fixed deposits.

Jan 19, 2015 05:01 IST India Infoline News Service

In a falling interest rate scenario, non-convertible debentures (NCD) offer itself as lucrative investment avenue, when one could lock-in higher interest rates for a longer term. NCDs are normally issued by non-banking financial companies (NBFCs).
 
Higher interest rate
 
The NCDs carry an investment term of five to ten years, while the interest rates are in the range of 9.30%-9.50%, which are 100-150 bps points higher than the rates offered on bank fixed deposits. NCDs come with the option of either annual coupon or premium on redemption. Credit agencies assign ratings to the NCDs and one with the highest rating is considered as a safe bet.
 
However, other than the coupon rate, there is one more benefit attached with NCD if invested now. NCDs could give capital appreciation benefits to the investors in the present environment, when the interest rates are set to go down, NCDs could comfortably provide 5-10% of capital appreciation. However, it is not advisable to retain NCD's until their maturity. Rather selling these instruments on the stock exchange after a year to get long-term capital appreciation for which exemption on long-term capital gain is also available. In this way, NCDs present itself as better options than debt-based mutual funds, where one has to wait for three years to get relief from capital gains tax exemption.
 
Tax-Free Bonds and FDs
 
The post-tax interest rates on NCDs are lower than those offered by tax-free bonds. Hence, it makes sense to wait for the issuance of these bonds, which are expected to come later in the year; NCDs would become ideal investment if their coupon rate is in between 11.5-12%. Otherwise they fetch only 6.5-7% return post tax.
 
Meanwhile, corporate fixed deposits are appropriate for senior citizens. As these deposits offer higher rates that are lucrative to senior citizens looking for interest income.

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