Non-Convertible Debentures (NCDs) - Definition, Types and Features
In today’s market, many investors want fixed returns without taking too much risk. While options like fixed deposits are safe, they often offer lower returns. That’s where Non-Convertible Debentures (NCDs) come in. They are a type of financial instrument that gives better interest than FDs and a fixed maturity period. For people who prefer steady income, NCDs are becoming a smart investment choice. They are offered by companies looking to raise funds from the public. And in return, investors get regular payouts and the full amount back after a set time.
What exactly are NCDs?
Non-Convertible Debentures (NCDs) are loans that companies take from the public in exchange for interest. When you buy an NCD, you are lending money to the company—not buying ownership like in stocks. The company promises to pay you interest at regular intervals (monthly, yearly, etc.) and return your full money after a set period. These debentures cannot be converted into shares, which makes them different from convertible debentures. NCDs are usually issued by big companies or NBFCs, and their safety depends on the credit rating given by agencies like CRISIL or ICRA.
Types of NCDs – Secured and Unsecured
Non-Convertible Debentures (NCDs) are mainly of two types—Secured NCDs and Unsecured NCDs. Understanding the difference between these two is very important before investing.
Secured NCDs
Secured NCDs are backed by the company’s assets, like land, buildings, or machinery. This means, if the company cannot pay back the investors, these assets can be sold to recover the money. Because of this protection, secured NCDs are considered safer than unsecured ones. They usually offer slightly lower interest but give peace of mind. These NCDs are suitable for investors who want steady returns with lower risk. Most trusted companies and financial institutions prefer issuing secured NCDs to gain investor confidence.
Unsecured NCDs
An Unsecured Non-Convertible Debenture (NCD) is not backed by physical collateral or company assets. Since they lack security, these debentures rely solely on the issuer's creditworthiness and typically offer higher interest rates to compensate investors for the increased risk.
Key Traits of NCDs You Should Know
Before you invest in Non-Convertible Debentures (NCDs), it’s important to know what makes them unique. These features help you decide whether NCDs match your financial goals and risk level.
Fixed Interest Income
NCDs offer a fixed interest rate, which means you will get the same amount of return at regular intervals. The interest can be paid monthly, quarterly, half-yearly, or annually depending on the option you choose while investing. This makes it a good option for people looking for regular income. Whether you are a retired person or a conservative investor, fixed returns bring financial comfort. Unlike stocks, returns are not affected by market ups and downs. So, NCDs give better predictability in income.
Fixed Maturity Period
Every NCD comes with a fixed maturity date—this is the date when the company will repay your original investment (principal). The maturity period usually ranges from 1 to 10 years. You should pick the maturity period based on your financial needs and liquidity plan. Once the NCD matures, the company pays back the full amount along with any remaining interest. This clarity makes planning easier for long-term goals like children’s education or saving for a house.
Credit Ratings by Agencies
Before an NCD is released, rating agencies like CRISIL, ICRA, or CARE give it a credit rating. This rating helps investors understand how safe the investment is. A higher rating like “AAA” means the company is financially strong and the risk of default is very low. A lower rating means higher risk, but such NCDs may offer better returns. Always check the rating before you invest—it’s one of the most important indicators of trust.
Option to Trade on Stock Exchange
Many NCDs are listed on stock exchanges like NSE and BSE. This means you can sell them before maturity if you need the money. Just like shares, they can be bought and sold in the secondary market. However, the price may change depending on interest rates and demand. This feature adds flexibility, especially if you want to exit your investment early. But remember, liquidity may be low for some NCDs, so always check trading activity.
Taxation on Returns
The interest you earn from NCDs is added to your total income and taxed as per your income tax slab. If you sell the NCDs before one year, the gains are considered short-term capital gains and taxed accordingly. For NCDs held longer than a year, long-term capital gains apply, with indexation benefits in some cases. Tax plays a big role in deciding your final returns, so always consider post-tax income while comparing NCDs with other investment options.
How to invest in NCDs ?
Investing in Non-Convertible Debentures (NCDs) is quite easy today. You can do it online or offline, through various platforms. Here’s a step-by-step guide to help you get started with your NCD investment.
1. Apply During Public Issue
Many companies offer NCDs through public issues at regular intervals. During this time, investors can apply for NCDs directly from the company, similar to how IPOs are offered. You need a PAN card and a demat account to apply. Applications can be submitted through your broker or online through banking apps and trading platforms. The NCDs are credited directly to your demat account once allotted.
2. Buy from the Secondary Market
If you missed the public issue, you can still invest by purchasing NCDs from the stock market. Listed NCDs are available on exchanges like NSE and BSE. You can buy and sell them just like shares, using your trading account. However, prices in the secondary market may differ based on interest rates and demand. Always check the credit rating and yield before purchasing from the market.
3. Use a Trusted Broker or Investment Platform
To make the process easier, use a reliable stockbroker like Motilal Oswal, Zerodha, Groww, or HDFC Securities. These platforms show upcoming NCD issues, interest rates, tenure, and credit ratings in a simple format. You can compare multiple options and choose what suits your financial goals. Some platforms also send alerts for new NCD launches, helping you stay updated.
4. Ensure You Have a Demat Account
A demat account is mandatory for investing in NCDs (except in some physical form cases, which are rare now). If you don’t have one, you can open it online with your PAN and Aadhaar. The demat account holds your NCDs in digital format, making transactions safe and fast. You can also track your holdings easily and receive interest payouts directly in your bank account.
5. Keep an Eye on Upcoming Issues
Many Non-Banking Financial Companies (NBFCs) and large corporates issue NCDs throughout the year. Keep checking your broker’s website, financial news portals, or company announcements. Planning in advance helps you grab high-rated NCDs before they close. Some NCDs get oversubscribed quickly, so early application is always better.
What to Check Before You Invest?
Before you invest in any Non-Convertible Debenture (NCD), it is important to do some homework. These simple checks will help you avoid risky choices and choose the right NCD based on your needs and comfort level.
1. Check the Credit Rating
The most important step is to check the credit rating of the NCD. Ratings are given by agencies like CRISIL, ICRA, or CARE and show how safe your money is with the issuer. Higher ratings like “AAA” or “AA+” mean low risk of default, while lower ratings mean more risk. Never ignore this step, especially for unsecured NCDs. Always prefer highly rated NCDs if you want safety.
2. Compare the Interest Rate
NCDs offer different interest rates based on the issuer and their creditworthiness. A high-interest rate may look attractive, but it often means higher risk. Instead of blindly chasing high returns, compare them with ratings and check if the rate matches your risk appetite. For example, an AAA-rated NCD offering 7.5% may be better than a lower-rated one giving 10%.
3. Know the Maturity Period
Every NCD comes with a fixed tenure—like 3, 5, or 10 years. Choose the tenure based on your financial goals and how long you can stay invested. Longer tenures may offer slightly better returns but also lock your money for a longer time. If you need funds sooner, pick NCDs with shorter maturity. Also, check if the NCD allows early exit options.
4. Study the Issuer’s Financial Health
Always check the company’s background, balance sheet, and past track record. Look for stable profits, low debt, and a good reputation in the market. You can find this information in the offer document or financial news websites. Investing in well-established NBFCs or corporates reduces the chances of default.
5. Understand Liquidity and Exit Options
Not all NCDs are easy to sell before maturity. Some NCDs listed on stock exchanges may not have enough buyers. So if you think you may need to exit early, check how frequently that NCD is traded. Also, look for call or put options—these allow early redemption by the issuer or investor under certain conditions.
Advantages of Investing in NCDs
Non-Convertible Debentures (NCDs) offer a mix of steady returns and lower risk compared to shares. If you are someone who prefers fixed income and a predictable investment, NCDs can be a good choice. Let’s look at some of their key benefits:
1. Regular and Fixed Income
One of the biggest advantages of NCDs is the fixed interest income. You get paid at regular intervals—monthly, quarterly, or yearly—based on your selection. This makes NCDs a great option for retired people or anyone who wants steady cash flow. Since the interest rate is fixed, you won’t be affected by market changes. It gives you peace of mind knowing exactly what you will earn.
2. Better Returns than Bank FDs
In most cases, NCDs offer higher interest than fixed deposits (FDs). For example, while FDs might offer 6–6.5%, many NCDs provide 7.5% to 9% or even more, depending on the issuer. This helps you earn more from the same amount of investment. But always balance returns with credit ratings. Higher returns are good, but not at the cost of safety.
3. Lower Risk (If Secured and Rated Well)
If you choose secured NCDs from companies with good credit ratings, the risk is much lower. These NCDs are backed by the company’s assets and come with regular monitoring. Compared to equity investments, secured NCDs do not face daily market ups and downs. This makes them ideal for conservative investors who don’t want to take too much risk.
4. Option to Sell Anytime (If Listed)
If your NCD is listed on the stock exchange, you can sell it before maturity just like shares. This adds flexibility in case you need money early. However, the price at which you sell may go up or down depending on interest rate changes and market demand. Still, it’s a helpful feature that gives liquidity when needed.
5. Diversification of Portfolio
Adding NCDs to your investment mix helps you reduce overall risk. While shares can give high returns, they also bring volatility. NCDs give stable income and balance the risk in your portfolio. A good mix of equity, NCDs, and other instruments creates a safer and more effective investment plan.
Risks and Limitations of Investing in NCDs
1. Credit Risk (Company May Default)
The biggest risk with NCDs is credit risk—if the company is not able to pay back your money or interest. This can happen due to poor management, losses, or market problems. If the NCD is unsecured or has a low credit rating, the risk is even higher. That’s why it’s very important to check the company’s background and rating before investing. Even well-known companies can face trouble, so don’t ignore this risk.
2. Interest Rate Risk
If market interest rates go up after you’ve bought an NCD, the value of your NCD may go down in the secondary market. This is known as interest rate risk. If you try to sell your NCD before maturity, you might get a lower price. This is common for long-term NCDs. So, if you plan to hold till maturity, this may not affect you, but traders should be aware.
3. Liquidity Risk
Not all NCDs are actively traded on stock exchanges. If you want to sell before maturity, you may not find a buyer quickly. This is called liquidity risk. It becomes a problem when you urgently need money or want to exit the investment early. To avoid this, choose listed NCDs with good demand in the market.
4. Tax on Interest Income
The interest you earn from NCDs is fully taxable under the “Income from Other Sources” section. This means, if you're in the higher income tax bracket, your post-tax returns will reduce. Unlike tax-free bonds, there are no special tax benefits in most NCDs. So always calculate your actual returns after tax before investing.
5. No Growth in Capital
Unlike shares, NCDs do not give you any capital appreciation. You will only earn fixed interest and get back the same amount you invested. There is no chance of bonus, dividend, or price growth like in equity investments. So if you're looking for long-term wealth creation, NCDs should be only a part—not the whole—of your portfolio.
Convertible Debentures vs Non-Convertible Debentures (NCDs)
| Feature | Convertible Debentures | Non-Convertible Debentures (NCDs) |
| Conversion | Can be converted into company shares after a period | Cannot be converted into shares at all |
| Ownership | You may become a shareholder after conversion | You stay a lender, not an owner |
| Returns | Lower interest, but chance for share value growth | Fixed interest income, no growth in value |
| Risk Level | Slightly higher risk due to market dependency | Lower risk (especially if secured and rated) |
| Best For | Investors looking for long-term capital growth | Investors wanting regular, stable income |
Why NBFCs Prefer Raising Money Through NCDs
Non-Banking Financial Companies (NBFCs) often choose to raise money through Non-Convertible Debentures (NCDs) because it gives them an easy and flexible way to get funds from the public. Instead of depending only on banks or equity investors, NBFCs can directly borrow from retail and institutional investors by issuing NCDs. This method allows them to decide the interest rate, repayment period, and structure of the loan according to their business needs. NCDs also help NBFCs reduce borrowing costs, as they can avoid high bank interest rates and additional charges. When issued successfully, NCDs also boost the company’s image and trust in the market. Well-known NBFCs like Muthoot Finance, Shriram Finance, and Edelweiss frequently use NCDs to support their lending activities and business expansion.
Investor-Friendly Examples
Imagine you have ₹1,00,000 and want to earn better returns than a fixed deposit, but without taking big risks like in the stock market. You decide to invest in an AAA-rated secured NCD offered by a trusted company like HDFC Ltd.
This NCD offers:
- Interest Rate: 7.5% per year
- Tenure: 5 years
- Payout: Interest paid annually
- Type: Secured and listed on the stock exchange
Every year, you receive ₹7,500 as interest (7.5% of ₹1,00,000), and after 5 years, you get your full ₹1,00,000 back. Since the company is top-rated and the NCD is secured by company assets, your investment is relatively safe. Plus, if you need your money early, you can sell the NCD on the stock exchange.
This makes it a great choice for someone who wants stable income, low risk, and flexibility just like you would get with a better version of a fixed deposit.
Conclusion
Non-Convertible Debentures (NCDs) are a useful option for investors who want fixed income and more returns than traditional savings options like FDs. They offer regular interest payouts, defined maturity, and come with choices like secured or unsecured types based on your risk level. With proper research—like checking the credit rating, issuer’s background, and maturity period—you can make smart, safe investment decisions.
While NCDs are not suitable for those chasing high growth like in stocks, they work well as part of a balanced portfolio. If you want predictable income, flexibility, and a moderate level of safety, NCDs can be a good addition to your investment plan. Just remember: don’t invest blindly—always understand the product, match it with your goals, and choose trusted issuers with good ratings.