What Are NCDs? A Complete Guide to Non-Convertible Debentures for Smart Investors

 

In the world of fixed-income investing, Non-Convertible Debentures (NCDs) have emerged as one of the most attractive options for investors seeking stable returns, lower risk, and diversified portfolios. Whether you are a conservative investor or someone looking to balance equity exposure, NCDs offer a compelling combination of predictable interest, credibility, and liquidity.

In this blog, we break down everything you need to know — from what NCDs are, how they work, types, risks, returns, taxation, and whether they fit into your investment strategy.

What Are NCDs?

A Non-Convertible Debentures (NCD) is a type of debt instrument issued by companies to raise long-term capital. These are called “non-convertible” because they cannot be converted into shares of the company at a later stage.

Instead of equity conversion, investors receive:

  • Fixed interest (coupon rate)

  • Principal repayment at maturity

NCDs are listed on stock exchanges and can be bought or sold, offering liquidity compared to traditional fixed deposits.

Why Do Companies Issue NCDs?

Companies issue NCDs when they need to raise funds for:

  • Business expansion

  • Refinancing existing debt

  • Working capital requirements

  • Infrastructure development

By offering attractive interest rates, they attract retail, HNI, and institutional investors.

Types of NCDs

NCDs come in two major categories:

1️⃣ Secured NCDs

  • Backed by company assets as collateral

  • Lower risk

  • Higher safety for investors

2️⃣ Unsecured NCDs

  • No collateral

  • Higher risk

  • Generally offer higher interest rates

Most popular NCDs in India fall under the secured category.

Key Features of NCDs

NCDs offer several investor-friendly features:

✔ Fixed Interest (Coupon)

Interest rates usually range between 8% to 11%, depending on:

  • Company rating

  • Economic conditions

  • Tenure

✔ Multiple Tenure Options

NCDs usually come with flexible maturities ranging from:

  • 1 year to 10 years

✔ Credit Ratings

Given by agencies like:

  • CRISIL

  • ICRA

  • CARE

Ratings help assess risk (e.g., AAA, AA, A).

✔ Market Liquidity

Most NCDs are listed on:

  • NSE

  • BSE

Allows investors to sell before maturity if needed.

✔ Interest Payout Options

You can choose:

  • Monthly

  • Quarterly

  • Annual

  • Cumulative (paid at maturity)

This makes NCDs suitable for regular income seekers, especially retirees.

How Do NCDs Work?

When you invest in an NCD:

  1. You lend money to the issuer company.

  2. The company pays you interest at a fixed rate.

  3. At maturity, the principal is fully returned.

Unlike equity investments, NCDs do not give ownership — you act as a creditor, not a shareholder.

Benefits of Investing in NCDs

NCDs offer compelling advantages:

🔹 Higher Interest Than Bank FDs

NCDs typically offer 1.5% to 3% higher returns than fixed deposits.

🔹 Predictable Cash Flow

Perfect for salaried individuals and retirees looking for steady income.

🔹 Listed on Stock Exchanges

You can exit early by trading the NCDs in the market.

🔹 Good for Portfolio Diversification

Balances equity risk and brings stability.

🔹 Highly Transparent

Rate, tenure, risk, and terms are clearly mentioned in the offer document.

Risks Involved in NCDs

Every investment comes with risks. NCDs carry:

❗ Credit Risk

If the issuing company’s financial health worsens, repayment may be affected.

❗ Liquidity Risk

Some NCDs may not be actively traded on exchanges.

❗ Interest Rate Risk

If interest rates rise, market price of NCDs may fall.

❗ Default Risk

Low-rated issuers pose higher chances of default.

To minimize risk, always choose:

  • AAA / AA rated companies

  • Diversify across issuers

  • Understand the company’s financials

Taxation on NCDs

✔ Interest Income

Taxed as per your income tax slab.

✔ Capital Gains on Selling NCDs

  • Short-term (holding < 36 months) → taxed as per slab

  • Long-term (holding > 36 months) → taxed at 20% with indexation

NCDs do not offer tax exemption like 54EC bonds.

Who Should Invest in NCDs?

NCDs are suitable for:

✓ Investors seeking higher returns than FDs
✓ Those who want regular income
✓ Investors aiming for low-to-moderate risk
✓ People building diversified portfolios
✓ Retirees and conservative investors

How to Invest in NCDs?

You can invest via:

✔ Online broker platforms

Zerodha, Groww, Upstox, or any broker offering NCD subscriptions.

✔ Demat account

Required for holding NCDs in electronic form.

✔ Primary Issue or Secondary Market

  • Apply during the public issue

  • Buy/sell later on the exchange

Conclusion

NCDs are a powerful fixed-income investment option offering higher returns, stability, and predictable income. While they come with some risks like credit and liquidity risk, choosing highly-rated issuers and maintaining a balanced portfolio can make NCDs a solid part of long-term financial planning.

For investors who want a safer alternative to equity markets while still earning better returns than traditional FDs, NCDs are definitely worth considering.

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