Introduction

Are you tired of bank FD rates of 6–7% and looking for better fixed-income returns? NBFC Non-Convertible Debentures (NCDs) might be the answer. In 2026, leading NBFCs like Bajaj Finance, Shriram Finance, and Muthoot Finance are offering NCDs with interest rates of 8–10% per year, significantly higher than bank FDs. NCDs are debt instruments where you lend money to an NBFC for a fixed period and earn interest. But higher returns come with higher risk and understanding both is critical before investing.

What Are NCDs?

Non-Convertible Debentures (NCDs) are bonds issued by companies to raise money from the public. Unlike convertible debentures, NCDs cannot be converted into equity shares. You lend money to the company for a fixed tenure and receive:

• Fixed interest (coupon) payments - monthly, quarterly, annually, or on maturity
• Your principal back at the end of the tenure

NBFC NCDs are issued by Non-Banking Financial Companies - companies that provide loans but are not banks (e.g., Bajaj Finance, Muthoot, Shriram).

Why NBFCs Issue NCDs

NBFCs need constant capital to fund their loan books. They can borrow from banks, but NCD issuance allows them to directly raise money from retail and institutional investors, often at lower cost than bank loans. SEBI regulates NCD issuances; a DRHP (Draft Red Herring Prospectus) must be filed before public offering.

Top NBFC NCDs to Watch in 2026

1. Bajaj Finance NCDs

• Rating: AAA (highest credit rating by CRISIL/ICRA)
• Interest rates offered: 8–9% per year
• Tenure options: 18 months, 36 months, 60 months
• Why invest: India's most trusted NBFC; strong balance sheet; excellent repayment history
• Risk: Very low - AAA-rated with over ₹4 lakh crore AUM

2. Shriram Finance NCDs

• Rating: AA+ (very high safety)
• Interest rates: 8.5–9.5% per year
• Focus: Commercial vehicle and MSME loans; strong south India presence
• Why invest: Consistent profitability; good liquidity in secondary market

3. Muthoot Finance NCDs

• Rating: AA (high safety)
• Interest rates: 8–9.5% per year
• Focus: Gold loans - secured lending backed by physical gold
• Why invest: Strong asset quality since loans are secured by gold collateral

4. Cholamandalam Investment NCDs

• Rating: AA+
• Focus: Vehicle finance and SME loans
• Why invest: Part of Murugappa Group; strong parentage and consistent growth

5. Mahindra Finance NCDs

• Rating: AA
• Focus: Rural vehicle finance and loans in semi-urban areas
• Why invest: Tata group-like parentage (Mahindra); strong rural reach

NCD vs Bank FD - Key Differences

Key Benefits of NBFC NCDs

1. Higher interest than FDs:  8–10% vs 6–7% in bank FDs; meaningful difference especially at higher corpus
2. Fixed, predictable income:  Regular coupon payments (monthly/quarterly/annual options) for budgeting
3. Multiple tenure options:  1 to 5+ years based on your cash flow needs
4. Listed on NSE/BSE:  Many NCDs are listed, allowing you to sell in the secondary market before maturity
5. SEBI-regulated:  NCD prospectus must disclose all financial information and risks
6. Diversification:  Adds fixed-income exposure beyond bank FDs and government bonds
7. Senior secured NCDs:  Some NCDs are secured by company assets, giving extra protection

Risks of NBFC NCDs

1. Credit Risk: The Biggest Risk

The NBFC could default (fail to repay). IL & IL&FS (2018) and DHFL (2019) defaulted on their NCDs, causing massive losses for retail investors. Always check the credit rating:

• AAA: Highest safety (Bajaj Finance)
• AA+/AA: Very high/high safety
• A: Moderate safety - acceptable with caution
• Below A: Avoid for retail investors

2. Liquidity Risk

Not all NCDs are actively traded on stock exchanges. If you need money before maturity, you may not find a buyer or may have to sell at a discount.

3. Interest Rate Risk

If RBI raises interest rates after you buy a NCD, new NCDs will offer higher rates making your existing NCD less attractive in the secondary market (price falls).

4. No Insurance

Unlike bank FDs (insured up to ₹5 lakh by DICGC), NCDs have no deposit insurance. If the company defaults, recovery depends on asset liquidation.

5. Tax Efficiency

Interest from NCDs is taxable as per your income slab same as FDs. No additional tax benefit unless the NCD is specifically tax-free (rare; usually issued by PSU infrastructure companies).

How to Invest in NBFC NCDs

Via IPO/New Issue

• Watch for NCD IPO announcements on NSE/BSE websites
• Apply through your Demat account (ASBA process)
• Allotment is on first-come-first-served or proportional basis

Via Secondary Market (After Listing)

• NCDs listed on NSE/BSE can be bought like stocks through your trading account
• May offer better price than IPO if market conditions have changed

Key Things to Check Before Investing

1. Credit rating:  Only invest in AA or above for safety
2. Promoter background:  Established NBFCs with track record (Bajaj, Shriram, Muthoot)
3. Interest coverage ratio:  Can the company comfortably pay interest from earnings?
4. NPA (Non-Performing Assets) ratio:  Low NPAs = good loan quality = safer investment
5. Secured vs unsecured:  Secured NCDs have asset backing; unsecured only have company promise
6. Coupon payment frequency:  Monthly if you need income; cumulative if you want to reinvest

Expert Tips

1. AAA-rated only for conservative investors - If capital safety is paramount, stick to AAA-rated Bajaj Finance NCDs
2. Diversify across 2–3 NBFCs - Don't put all money in a single NCD
3. Match tenure to your needs - Don't lock money in 5-year NCDs if you might need it in 2 years
4. Check listing status - Choose listed NCDs for exit flexibility
5. Compare with Sovereign Gold Bonds and RBI Floating Rate Bonds - These are fully government-backed and often yield 7–8%
6. Don't chase highest yield - 12–15% yield NCDs from unknown NBFCs carry very high credit risk

Conclusion

NBFC NCDs in 2026 offer an attractive middle ground between bank FDs (too low yield) and equity (too high risk). With rated NBFCs like Bajaj Finance, Shriram Finance, and Muthoot offering 8–10% interest, NCDs can meaningfully boost fixed-income returns. The key is choosing high-rated, reputable NBFCs and avoiding the temptation of high-yield, low-rated NCDs from lesser-known companies. Invest only in AA or above rated NCDs, diversify across 2–3 issuers, and ensure you don't need the money during the tenure for a safe, rewarding fixed-income experience.

Disclaimer: This article is for informational and educational purposes only. NCD investments carry credit risk and are not insured. Please consult a SEBI-registered advisor before investing.

Also read: What are pros and cons of investing in NBFC NCDS

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