With a number of companies offering fixed deposits and non-convertible debentures at competitive rates, debt investors need to take a call on which one is better for their finances. Bank fixed deposits (FDs) will assure stable returns, but after accounting for inflation, the returns will not be worth much. If the same company offers an opportunity to invest in its secured non- convertible debentures (NCDs) should you invest in these? Yes, since credit risk is lower in case of NCDs. The returns will also be higher after tax.
For example, Shriram Transport Finance came out with a secured NCD issue recently. The effective yield for retail investors is 10.90 per cent and 11.15 per cent, for a three-year and five-year tenure, respectively. The company also has an FD scheme, which offers interest rates between 8.95 and 10.75 per cent, on non-cumulative deposits and between 9.25 and 10.32 per cent on cumulative deposits. The tenure of the deposits range between one year and five years.
The difference: secured NCD is senior debt, while a company FD is a junior debt. This means a company FD is unsecured. In the case of default by the company or if the company if facing liquidation, depositors have no claim over the company's assets.
On the other hand, a secured NCD is backed by assets, which are held by a trustee. In case of a default, investors of the NCDs will have a right to the assets of the company. This makes the secured NCD issued by the company more secure than the FD of the same company.
According to Feroze Azeez, director and head (investment products) at Anand Rathi Private Wealth Management, one must consider the FD only if the interest rate is substantially higher than the NCD.
Company FDs are not listed on stock exchanges, while NCDs are, though they have little liquidity. "If you want to sell your NCD, you may be forced to sell them at a lower rate than the principle. While in such a case you can claim capital loss, ideally, that should not be the aim. Primarily, the idea of investing in an NCD is to get interest rate. Besides, there have been cases where the price of the NCD has fallen by five-six per cent after listing. Therefore, it is advisable to hold on to the NCD till maturity, take the interest on a regular basis and reinvest in a systematic investment plan," warns Kiran Kumar Kavikondala, director, WealthRays group.
In case of an NCD, it is mandatory for the issuing company to get it rated, since it is a listed instrument. However, in case of an FD, the company has to voluntarily submit itself for rating, says Suresh Sadagopan, a certified financial planner. So, investors will know the risk of the instrument from the rating in case of NCDs, for a company FD that doesn't have ratings, one will not know how risky or safe the instrument is.
The Shriram NCDs have been rated "CRISIL AA/Stable" by CRISIL and "CARE AA+' by CARE, the FDs are rated "FAA+/stable" by Crisil
and "MAA+/stable" by Icra. Whether you choose to invest in an NCD or an FD, look for companies that have strong fundamentals and are highly rated.