Three reasons why investing in secured NCDs trumps company's FDs

If you have an option to invest in a company’s Fixed Deposit (FD) or the same companies secured Non Convertible Debenture (NCD), which one is a better pick to invest in?

According to an analysis in the Business Standard today. secured NCDs are a better option than the same company’s FD.

There are quite a few reasons for choosing a secured NCD over a company FD.

First, the credit risk for NCDs is lower than that of a FD. The important thing to keep in mind is that unlike the NCDs which are a secured debt, FDs aren’t. And, in case the company defaults or faces liquidation, you will simply lose your money if you’ve invested in company FD, since it’s an unsecured debt.

The second reason is that the post-tax returns which you get with NCDs is higher than FDs.

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And thirdly, FDs offer slightly less liquidity as compared to NCDs. The truth is more often than not, NCDs are bought with the objective of gaining interest, and good liquidity isn’t the primary concern of the investor.

In case you have to sell the NCDs before the maturity date, you might have to bear a small loss, which can be claimed as capital loss for income tax purposes. But ideally, NCDs should be held to maturity to make the most of them. Also, when it come to NCDs, since company have to compulsorily get then rated from rating agencies you get to know the risk rating of the instrument.

So, does that mean, you should not invest in company FDs at all? Not really. If the company FD offers a substantially higher rate of return over the NCD, and you have the stomach for some risk, an FD might just work for you.

Read the full Business Standard report here.