My SBI FD of Rs 2 lakhs is maturing next month and I was just going to renew it. But a colleague said I should look at NCD investments instead since the returns are better. I don’t know much about NCDs. Is it actually a good alternative or is there something I am missing?
This is one of the most common questions people have when they first explore beyond FDs. Both are fixed income instruments but they work quite differently.
An FD is a deposit with a bank. It is insured up to Rs 5 lakhs by DICGC, the returns are guaranteed, and there is no credit risk involved. An NCD is a bond issued by a company. You are lending money to that company, not depositing it in a bank. The returns are higher but you are taking on issuer risk, meaning your safety depends on how financially sound that company is.
I still keep FDs for the portion of money I absolutely cannot afford to lose. NCDs for the rest where I am okay taking some risk for better returns.
yeah i was in the same spot last year
ended up putting half in an NCD and renewing the FD for the other half
the NCD return was noticeably better but took me a while to get comfortable with it
but what is the actual return difference we are talking about here? like how much more does an NCD give vs FD
depends on the rating and tenure but roughly:
SBI FD 3 year: around 6.8 to 7%
AA rated NCD 3 year: around 9 to 10%
A rated NCD: can go up to 11 to 12%
the gap is real. on Rs 2 lakhs over 3 years that difference in compounding is not small. the question is whether you are comfortable with the issuer risk on the NCD side.
okay so the return is meaningfully higher. but what does issuer risk actually mean in practice? like what is the worst case
Worst case is the issuer defaults and you lose some or all of your principal. That said, the probability of this varies a lot by rating. An AAA or AA rated issuer defaulting is rare but not impossible. A BBB rated issuer carries meaningfully higher risk.
The other scenario is a rating downgrade. Even if there is no default, a downgrade can affect the market value of the bond if you need to sell before maturity. If you hold to maturity and the company pays, you get exactly what was promised. The risk shows up mainly in stress scenarios or if you need early exit.
One more thing worth knowing before deciding. Both FD interest and NCD coupon income are taxed at your income slab rate. So the post-tax return difference narrows slightly compared to the headline numbers.
For someone in the 30% bracket: 7% FD becomes roughly 4.9% post-tax. 9.5% NCD becomes roughly 6.65% post-tax. Still a meaningful gap, just not as wide as it looks on paper.
If you are investing for the first time outside of FDs, a few practical things to check before buying any NCD. Credit rating should be AA or above ideally. Check whether it is secured or unsecured. Secured means the issuer has pledged assets against the borrowing which gives you more protection in a default scenario. Also check the coupon frequency so you know when you will receive interest payments.
fd = bank deposit, insured, lower return, zero credit risk
ncd = company bond, not insured, higher return, depends on issuer quality
for Rs 2 lakhs starting out, most people do a mix. not all in NCD first time
this really helps. think i’ll renew part of the FD and try one NCD with the rest. will check ratings properly before picking