NCDs Vs Fixed Deposits: Which is better? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

NCDs Vs Fixed Deposits: Which is better? 

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In this issue:
» Deflation devil to blow away the stock market rally
» PM blames CAG and CVC for policy paralysis
» Chinese government spending increases in the last 5 years
» Moody's to hold fort on India rating
» ...and more!

With equity markets losing sheen, investors have turned their focus towards fixed income products especially corporate non-convertible debentures (NCDs). NCDs are rated instruments that come with a coupon slightly higher than fixed deposits (FDs). Of late they have attracted considerable interest amongst retail investors. In fact, as per an article in Live Mint, there have been roughly 7 NCD issues in the last four months running up to December 2013 and all have been oversubscribed.

Higher interest vis-a-vis FDs and fixed return guarantee when compared to debt mutual funds is the primary reason behind the recent euphoria in NCDs. Debt mutual funds are akin to equity mutual funds in the sense that both are prone to negative returns during slack periods. On the other hand, NCDs assure fixed returns. With investors turning risk averse and looking for guaranteed returns, NCDs have turned out to be preferred investment avenue for them. Higher credit rating further ensures minimal default risk.

Higher returns and minimal risk are the reasons why investors have bee-lined to mop up issues after issues that have hit markets. But are NCDs completely risk free? And are higher returns vis-a vis FDs sustainable? We have mentioned our views on ongoing NCD issues and addressed questions like these in some of our recent editions of The 5 Minute Premium. We highlight them again here.

For one, NCDs are not risk free instruments. Issues with sub-optimal credit rating do have default risk. Hence, investors should not get lured away by higher returns and assess the credit quality of such issues. They should invest in issues of companies that have established track record of servicing payments in the past and an investment grade credit rating.

Many believe that the interest rate cycle is at its peak. Hence, locking in higher returns from NCDs could be a good idea. Though inflation has subsided recently, it is quite likely that it may rear its ugly head again. And with RBI having committed itself to inflation management one cannot completely rule out a rise in interest rates. If interest rates rise, borrowing cost of banks would increase. This may force banks to look for funds outside the repo window. Time deposits like FDs are one such source. In order to lure investors to lend to them, banks may have to offer higher interest rates on FDs. This may reduce the interest differential between NCDs and FDs in future.

Again, returns from bank FDs are guaranteed while in case of NCDs, there is a chance of default if the business environment of the issuing company worsens. Taxation of returns is another factor to consider. Hence, while comparing return differential investors should consider after-tax return of both the instruments. Also, one should assess the risk factors and take their time horizon into consideration before investing.

Do non-convertible debentures offer a better investment alternative compared to FDs? Let us know your comments or share your views in the Equitymaster Club.

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01:50  Chart of the day
It has been alleged many a time that data released by China is not always reliable. Take government spending for instance. As today's data shows, this has steadily increased every year since 2009. Government spending by itself has no meaning unless there is more clarity on which areas this money is being spent. In this regard, as per an article in CNN Money, significant chunk of government spending in China has been going towards education, employment and social security, agriculture, water and general public service. One may conclude that given the slowdown in the Chinese economy in recent times, an increase in wasteful government spending may not necessarily be good. But if the government is spending towards the areas mentioned above, then we believe it will reap benefits for the economy in the longer run. Indeed, the country does fare much better compared to India whose total expenditure largely consists of unproductive items such as subsidies and interest payments.

Total Chinese government spending since 2009
Note: Figures are not unadjusted for inflation

What do you think is a bigger threat to the global economy right now, inflation or deflation? Well, given the relentless money printing happening, one can't help but choose inflation as the biggest risk. An article on however thinks differently. It cites data from most developed regions across the world and opines that the low level of inflation in these countries is really perplexing. Thus, it is deflation that's a bigger risk right now than inflation. And when a deflationary spiral takes hold, it becomes really difficult to come out of the vicious circle.

Well, if that's the case then why aren't the stock markets reacting as deflation is bad for the economy and also for stocks? Simply because investors aren't expecting a deflation any time soon. They have been lulled into believing that Governments won't let deflation take root and will keep printing money at the first sign of trouble. And this newly printed money would then keep stocks at elevated levels. However, this belief is misplaced as per the article because if QEs always led to asset price increases, what explains the huge underperformance of gold and other commodities? Therefore, just as these asset classes didn't react to more QE, there are chances that even stocks won't. As a result, stocks could fall at the same time as recession unfolds and this will not make for a very good sight. Well, we believe this is just one of the myriad theories floating out there. However, the crux of the matter is that we indeed live in an extremely fragile environment. And therefore it will make sense to keep some gold handy.

We know it are questions like these on deflation and excessive money printing that bother you the most while investing. In order to answer them and many more we have now started accepting registrations for The Equitymaster Conference 2014. With Mr Ajit Dayal being the keynote speaker and the theme being 'Beyond Uncertainty' we are looking forward to an engaging session on 1st February 2014.

Average growth of 7.9% in GDP over 9 years. Projects worth Rs 5 trillion sanctioned. Such a track record could have certainly adorned the tenure of the UPA government had it not been for the multi crore scams. Unfortunately, PM Manmohan Singh believes that his government has not received its due credit. He believes that the dual tenures of the UPA government could have been a lot more fruitful if bureaucratic obstacles were overcome. According to Economic Times, the PM has blamed the unwillingness of bureaucrats to sanction projects for the economic stagnancy. This he believes is out of fear of the CAG and CVC ever since the 2G spectrum and coal scams were unearthed. While there is truth in the fact that project delays have paralyzed the economic growth engine, one can hardly empathize with the PM. As long as projects are cleared in an ethical and transparent manner, the officials have no reason to fear, we believe.

Education costs have surged over the past few years. And, with the number of people eligible for jobs not being absorbed into workforce - or for that matter, their expectations or full potentials not being met - could lead to problems. But when these continue over longer periods, there would only be one outcome: Major disgruntlement. This is just one of the many major global risks that the World Economic Forum has identified in the years to come.

Wealth distribution and inequality is another key aspect that has only been widening over the past few years. With such developments being brought to the knowledge of the masses, the outcome of these prolonged occurrences would be protests and riots, which are significant enough to bring about changes in the system. At the end of it all, these would only lead to impact the global economies and their growth.

The Indian economy is going through one of its toughest tests at the moment. Despite successive rate hikes in the past, inflation has not come down to the levels that the central bank had anticipated. Meanwhile, GDP growth has slowed down and fiscal deficit is out of control. All this had put pressure on India's credit rating. However, according to Moody's, India is expected to witness a slow economic recovery in the second half of this year if global growth increases. And with the current account deficit improving, India's ratings downgrade is not on the cards. If Moody's expectations come true, the wait for a recovery for India's economy will get longer. Policy makers had expected the recovery to start from the second half of FY14. However, there are no signs of it happening for at least till the third quarter of the year.

Global indices had a mixed performance this week as the earnings season kicked off around the world. The US markets ended the week flat after corporate giants like American Express, General Electric and Intel all delivered mixed bag of results. No clear direction has emerged so far, as a trend, in terms of earnings for US firms in the quarter gone by. The Dow was up 0.1% for the week, while the benchmark S&P 500 index slipped by 0.2%. The NASDAQ gained 0.55% for the week. The European indices were up this week. The German DAX, British FTSE and the French CAC indices were up by 2.9%, 1.2% and 1.8% respectively. The European indices did not respond negatively to an IMF warning about GDP growth in the EU as well as a possibility of future sovereign downgrades by global credit rating agencies. The German markets also shrugged off a report which stated that Deutsche Bank was considering a profit warning, for the quarter.

Back home the Indian indices, had a good week as the results season got under way. The benchmark BSE Sensex ended the week up 1.5%. The markets cheered the inflation data which showed a fall in both the WPI as well as the CPI on a month-on-month basis.

Performance during the week ended 17 Jan 2014
Data Source: Yahoo Finance, Equitymaster

04:50  Weekend investing mantra
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8 Responses to "NCDs Vs Fixed Deposits: Which is better?"


Mar 12, 2014

TDS is tedious.


Alphones Rayappan

Jan 19, 2014

Good study and advise from Equity master.


A Gurumoorthy

Jan 19, 2014

Investment in NCD vs Fixed Deposit shall be considered after considering the following options

1) From a Return perspective, NCD's is preferred as they offer better returns ( both Pre-tax and Post tax returns)

2) From a Liquidity perspective, Fixed deposits are more preferred as compared to an NCD's as FD can be immediately pre-closed (or) Loan against FD option is available, which is not possible with a NCD's

3) Assuming there is no commitment attached to the investment and investor can wait the 3-5 years horizon, NCD's are a more preferred investment option

Like (1)


Jan 19, 2014

Both have their plus points and negative points. The investment decision depends on the investor's situation at that point in time. My personal preference is for NCD's mainly because there is no TDS when held in demat form. I dislike TDS.

The IT Dept refuses to pay refunds in a timely manner and very often one has to bribe IT staff to get the refunds processed quickly. So why should I give the IT dept tax in advance? I will pay my tax in full as and when it is due. If the IT dept promptly issues refunds every year then I don't mind TDS. But as things stand the IT dept is a third rate organization which does not want to return tax payer's overpayment.

Like (1)

R K Gogate

Jan 18, 2014

Genearally the rates offered by the compnies varies inversly as their reliability. If need arises to sell it prematuredly NCDs sell at a discount i.e. one looses from the capital itself and may loose accumulated interest as well.
In case of banks at present the trend is not to penalise the depositer for pre matured withdrawal as long as the time slot of the interest rate does nit change. Moreover your full deposit ammount is returned.
I prefer

Like (1)

R N Gokhale

Jan 18, 2014

Dear Sir,
Risks of NCDs well brought out, But consider the Public sect undertaking NCDs, these enjoy sovereign guarantee and also have been given top ratings by all agencies. and appear to be better placed than pvt company NCDs/FDs.

Like (1)


Jan 18, 2014

If the NCD IS 'secured'will it not become a safe instrument?

Like (1)

n k patet

Jan 18, 2014

My own experience: ncd should be avoided; i have personally lost out so much so i went out of this market for a whole lot of years and even now highly cautious. Go for FDs.

Like (1)
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