NCD v.s FD? Latest NCD Offers in Market

With crude oil prices under control and inflation taming up, NCD has become a good opportunity of investment for the debt investors. There are several reasons why NCD is becoming a lucrative option for the investors apart from the high interest rate, here in this article; we have compared NCD versus FD and which is worth to invest in.

Safety of Capital

If you are a conservative customer and don’t wish to experience the strong or weak headwinds of the stock market, then nothing can beat conventional FD. It is a safe investment option. Moreover, the investments upto Rs 1,00,000 is backed by Deposit Insurance and credit Guarantee Corporation, as per the rules, the depositor will get Rs 1 lakh for both the principal amount and interest amount.

However, when it comes to NCD, the safety of capital is subject to the ratings of debentures.  For example, the NCD raised by Shriram Finance, Magma and L&T, have a high rating and it denotes the level of safety.

Though the experts are optimistic about these investments, but they are subject to credit risk.

Liquidity

Bank FD is far more liquid as compared to NCD, as it comes with a lock- in period and doesn’t allow premature surrender, but right now we are suffering from liquidity crisis situation hence retail investors are getting more attracted to such offers.

Coupon Rate and Volatility 

When it comes to interest, nothing can beat investment in NCD, for example , Tata Power, which  is planning to raise an NCD, will carry a coupon rate of 9.15 percent payable annually, which is far higher than bank FD, Magma Fincorp is  offering a coupon rate of 10.25% and 10.5% for 3 years and 5 years. Muthoot Finance will offer an interest rate of 9.5% and 10% for 24 and 60 months. Shriram is offering a coupon rate of 9.55-9.75%, and on the other, the bank offers maximum interest rate of 6.40% for one year.

If we see the NCD schemes carefully, we will analyze that these schemes are highly profitable. For example, the investors will get 200 basis points on AAA rated NCD and about 240 basis points higher in Shriram Transport, which is great opportunity for the investors.

NCD offered by these companies is more volatile and they are not risk free instruments. Hence, the buyer should ascertain the credit profile of the company issuing NCD and the payment rate. AAA signifies the highest level of security with minimum default rate, but it will fetch lower coupon rate.

In the end, we would like to conclude that as the economy is better poised for low interest rates in the coming days. Therefore, it makes sense for the retail investor to lock their money into products that can pay them higher interest for a long time period.