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NCD

8-JUNE-2019

Author: Team - Edelweiss Partners

India has been traditionally a saver’s nation, wherein a part of the monthly income had been going into bank and post office deposits. However, with the evolution of the financial markets, interesting debt investment products have evolved in line with the development of money market. This includes Non-Convertible Debentures (NCDs) and Fixed Maturity Plans (FMPs). Here is a sneak peek of both these products:

  1. NCDs/ Bonds – NCDs can be equated with the bank deposits as they also come with a fixed tenor and fixed rate of interest. While there may be certain innovative products like inflation-indexed bonds, floating rate bonds, but we will keep this discussion to simpler bonds only. Generally, NCDs are also listed by the issuing entity to impart liquidity to the investors, since listing can help the investors get a ready market for the securities.

  2. FMPs – FMPs are a category of mutual funds, which come with a fixed maturity date. However, as against FDs/ NCDs, they do not offer guaranteed returns. However, the portfolio of FMPs will also be investing in the fixed income securities, the return given by FMPs are in the range of market interest rates only.

So, now that you are clear about the basics of NCDs and FMPs, let us analyze their position as against the traditional investment avenues:

  1. Convenience to invest Money – Just like an FD can be started with a bank over net banking etc., one can also invest in NCDs/ FMPs directly through the stock exchange or mutual fund house’s website. However, the direct investment can only be made while a public issue/ NFO is open for NCD/ FMP respectively. Further, since the investments are made through a Demat account or mutual fund folios, the investments can always be retrieved easily at any later date as well.

  2. Periodical Cash Inflows – NCDs usually come with annual interest payout option. The payout frequency is determined for the debenture at the time of issue. Similarly, you can also choose to invest in dividend option of FMP which can help you with periodical inflows of cash, just like periodical interest payouts in case of a bank FD.

  3. Liquidity for the Amount Invested – While FDs come with a premature withdrawal option, the listing of NCDs/ FMPs on stock exchanges imparts them the desired liquidity.

  4. Returns – Since NCDs are issued by different Corporates with varying credit ratings, the returns offered by them depend upon the credibility of the issuing company. However, in case you purchase NCDs from stock exchanges, the trade rate will be in tandem with the current market interest rates as the market forces adjust the security price accordingly. Similarly, FMPs also provide comparable returns since they pool the funds to invest in fixed income opportunities available in the market.

  5. Tax Efficiency – Interest from NCDs is always taxable as per the tax rates applicable to the investor. However, in case you wish to sell NCDs through stock exchanges, long-term capital gain would be taxed at a concessional rate of 20% without indexation if the NCDs have been held for more than 36 months. Similarly, the tenor of FMPs is fixed accordingly to make them more tax efficient.

Given these inherent benefits, NCDs and FMPs emerge as a better investment option than the traditionally fixed income investment options. Preferential tax treatment adds the desired sweetener to the returns. So, next time you have some surplus funds to be invested in debt portfolio, don’t forget to consider NCDs and FMPs.

Edelweiss Partners provides you a one-stop online platform for tracking and recommending NCDs offered by major corporates, financial institutions, and Non-Banking Finance Companies along with the New Fund Offers for FMPs.

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