NCD Comparison

Full Form

Initial Public Offerings (restricted to the issuance of equity shares for this context)

Non-Convertible Debentures

Definition

IPO stands for Initial Public Offering. In an IPO, a company offers it's shares to the general public for the very first time through the primary stock market.

The public issuance of debt securities by a company, such as bonds or debentures, is known as an NCD issue or NCD IPO.

Ownership

The shareholders (in the case of share allotment in IPO) become the owners of the company to the extent of shareholding in the company.

The ownership of the company does not get transferred to the NCD holder.

Investment Tenor

There is no maturity period in an IPO. Investors can sell the shares whenever they want after the listing.

There is maturity for NCDs. Before maturity, investors can sell their debentures (if NCDs are listed or a put option is applied), but for good returns, they should wait until the maturity of the NCDs.

Interest Rate

There is no concept of interest rate in IPOs.

For the money raised by the company through NCD, they pay a particular interest, and on maturity, the investors receive the principal and interest amounts.

Tax implications

The profits made from the sell of IPO shares on the listing are subject to long-term and short-term capital gains as applicable.

Interest income from NCDs will be subjected to tax at normal rates by including it in 'Income from other sources'.

Full Form

Non-Convertible Debentures

Fixed Deposit

Investment Tenor

NCDs are long term fixed income instrument ranging from 1 year to 10 years

FDs are short term to medium term fixed income instruments ranging from 3 months to 5 years

Interest Rate

NCDs offer a higher rate of interests compared to FDs.

FD interest rates are comparatively lower than NCDs.

Tax implications

Interest on NCD is treated as other income and taxed as per investor tax slab

Interest on FD is also treated as other income and taxed as per investor tax slab.

Trading

Investors can trade in NCDs, provided they are listed.

There is no trading of FDs.

Premature/Early Exit

NCDs cannot be withdrawn before maturity. One can sell the listed NCD and make an exit. However, the NCD remains intact. The NCD holder gets changed but the NCD continues unless there is a call option attached to an NCD.

Investors can exit from an FD at any point of time by paying a small penalty.

Liquidity

Lesser liquidity as withdrawal is not possible and NCD secondary market is not so liquid.

Highly liquid.

Minimum Investment

NCD investments require a minimum investment of Rs. 10,000.

The minimum FD investment amount varies from bank to bank. It is generally Rs. 1,000 or Rs. 5,000 and in some banks Rs. 10,000.

Degree of safety

NCDs are rated by credit agencies indicating the degree of safety and risk attached to an NCD. A good rating of AA and above indicates higher degree of safety. The credit ratings indicate the level of assurance of payment but no guarantee.

FDs are covered up to a maximum of Rs 5,00,000 for both principal and interest amount under DICGC for an investor including his savings amount. (Deposit Insurance and Credit Guarantee Corporation)

Who issues?

NCDs can be issued by public or private companies.

Corporate FDs are generally issued by non-banking financial companies (NBFCs) and Housing Finance Companies.

Credit Rating

Mandatory to have credit ratings

May not have credit ratings.

Risk

Less risky as compared to Corporate FDs as these are rated by credit agencies which can indicate the level of risk. Moreover, most of the times NCDs issued are secured.

Corporate FDs are not backed by any collateral hence little risky.

Liquidity

More liquid than Corporate FDs. Can be traded before maturity.

Not tradable. Cannot be easily withdrawn before maturity.

Call-put option

NCD may have call options or early redemption options, allowing the issuer to repay the debt before the maturity.

There’s no call or put option in Corporate FDs.

Early withdrawal

Possible in the case of listed NCD wherein the investor can sell off his NCD and make an exit at the available price.

Difficult and tedious process. The early withdrawal may be permitted post a certain lock-in period (different from corporate to corporate). Prematurity, if allowed, is done by charging a penalty.

Investor Protection

NCDs are regulated by the SEBI when they are listed on stock exchanges.

Corporate FDs fall under the purview of Companies Act, and the issuer is regulated by the Ministry Corporate Affairs.

Safety

Secured NCDs are safer.

Corporate FDs are not covered under DICGC unlike bank FDs hence little risk.

Taxability

TDS is not applicable.

Interest from NCD is charged under the head Income from other sources. In the case of sell of NCD, short-term and long-term capital gains tax is levied as applicable.

TDS is applicable in the case of corporate FDs.

Meaning

Fixed-Income securities issued by public or private companies to raise funds from the public in return for a fixed interest rate.

Mutual Funds that allocate funds to debt instruments like corporate bonds, government bonds, commercial papers etc. are known as debt mutual funds.

Diversification

NCDs are individual instruments, and investing in them exposes the investor to the credit risk of the issuing company.

Debt mutual funds, on the other hand, provide diversification as they invest in a variety of debt instruments issued by different entities such as government securities, corporate bonds, money market instruments, etc.

Liquidity

NCDs are typically less liquid than debt mutual funds.

Debt mutual funds can be redeemed with the fund house at the prevailing net asset value (NAV) on any business day.

Risk and Credit Rating

NCDs carry issuer-specific credit risk, meaning the investor is exposed to the creditworthiness of the issuing company. Higher-yielding NCDs may carry higher credit risk.

Debt mutual funds also carry credit risk, but the risk is spread across multiple issuers.

Management and Professional Expertise

NCDs require investors to conduct their own analysis of the issuing company's creditworthiness.

Debt mutual funds are managed by professional fund managers who have expertise in analyzing and managing debt securities

Taxation

The interest income earned from NCDs is subject to tax as per the individual's income tax slab rate.

Debt mutual funds held for more than three years qualify for long-term capital gains tax with indexation benefits, while those held for three years or less are subject to short-term capital gains tax as per the individual's income tax slab rate.

Accessibility

Online NCD application facility is not available to all brokers.

Debt Mutual funds can be easily applied online through fund houses.

Structure

Fixed-income instruments issued by corporations.

Pool of funds invested in diversified portfolio of securities (stocks, bonds, or a mix of both)

Risk

Relatively lower risk compared to equities.

Risk varies based on underlying assets (equity, debt, etc.).

Returns

Fixed interest rates over a specified period. Typically, higher than bank fixed deposits.

Potential for higher returns over the long term; vary based on asset class.

Liquidity

Generally, have a fixed tenor; liquidity may be lower, especially if not actively traded.

Offers high liquidity; investors can buy/sell units at Net Asset Value (NAV).

Taxation

Interest income taxable as per investor's income tax slab.

Equity mutual funds held for over one year are taxed at a flat rate of 10% on gains exceeding ₹1 lakh in a financial year (as of current Indian tax laws).

Meaning

Secured NCDs have some assurance of repayment. They are safer and more reliable because secured NCDs are supported by company assets.

Unsecured NCDs come with no guarantees of payment if the company fails.

Interest Rate

NCD interest rates are lower for secured NCDs as compared to unsecured.

NCD interest rates are higher for unsecured NCDs.

Risk

Secured NCDs are safer and more reliable than unsecured NCDs.

Unsecured NCDs have a comparatively higher risk.

Issuing body

Public or private companies.

Usually, government or financial organizations.

Investment Type

NCDs can be secured or unsecured. Choosing a credible organization when investing in debentures is essential.

Secured with collateral. To a certain extent, bonds are secured.

Conversion possibility

Cannot be converted to equity shares.

Some convertible bonds can be converted to company stocks.

Tenure

Generally lesser than bonds, but may vary between 3 and 20 years depending on the issuing company.

Long term investments ranging from 10 to 30 years. This depends on the issuing company.

Risk

Riskier compared to bonds.

Generally backed by collateral, hence less risky.