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Googling for an investment option other than fixed deposits and equities? Most likely, debt instruments would be the other alternative you might be interested in. Among them, bonds and non-convertible debentures (NCDs) are two popular choices. When you research them for the first time, both may seem almost identical. This is due to the reason that both offer fixed or predictable returns, both are debt instruments, and both are used by issuers to raise money. However, when you learn more about bonds and NCDs, you’ll get to know that there are several important differences that can impact your returns, risk exposure, and overall financial planning.
This blog aims to simplify the topic of bonds vs NCDs in a conversational and easy-to-understand way. Once you read this blog completely, you’ll understand how exactly they differ, who should invest in which instrument, and how to choose the right instrument based on your goals.
Understanding Bonds
The term Bonds, in simple terms, means debt instruments issued by governments, public sector undertakings, and financial institutions. Sometimes, large corporations also issue bonds. Assume that you are investing in a bond. Here you are lending money to the issuer for a fixed period. In return, the issuer promises to pay you regular interest, generally known as a coupon. At maturity, the issuer will repay your principal amount. This is how bonds work.
Bonds are generally considered relatively safer investment options, especially government bonds, as their risk of default is low. Conservative investors commonly use them, as a priority is given to capital preservation and stable income.
Some common types of bonds include:
- Government bonds
- Corporate bonds
- Municipal bonds
- Tax-saving bonds
Risk, return, and taxation of each type of bond vary. However, the basic structure of all types of bonds are the same.
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What Are Non-Convertible Debentures (NCDs)?
1: What is a stock?
You might have come across the term NCDs quite often. NCDS is nothing but the short form for non-convertible debentures. They are also debt instruments issued by companies to raise funds. An important characteristic of NCDs is that they cannot be converted into equity shares. This makes them purely fixed-income instruments.
NCDs are mostly issued by private companies, NBFCs, and financial institutions. They usually offer higher interest rates when compared to bonds, especially government bonds. Here, higher interest rates are offered to compensate investors for taking on higher risk.
NCDs can be:
- Secured or unsecured
- Listed or unlisted
- With fixed or floating interest rates
Because of their attractive interest rates, NCDs often appeal to investors seeking higher regular income.
Bonds vs NCDs: Major Conceptual Differences
If we compare bonds vs NCDs, the primary difference lies in who issues them and the degree of risk involved. Bonds are often associated with stability and safety, while NCDs are more return-oriented and they also carry additional risks.
Bonds, particularly government bonds, are backed by sovereign assurance. On the other hand, NCDs depend entirely on the issuing company’s financial health.
Another key difference is perception. Bonds are generally seen as long-term, stable instruments, while NCDs are viewed as medium-term opportunities to earn higher interest.
Issuers and Credit Quality
Issuer quality plays a major role in deciding between bonds and NCDs.
- Bonds: Government bonds are issued by central or state governments. Corporate bonds are issued by well-established companies. The credit risk is generally lower, especially in the case of sovereign bonds.
- NCDs: Mostly issued by private companies and NBFCs. Credit quality can vary significantly depending on the issuer’s financial strength.
While both instruments are rated by credit rating agencies, investors should be more cautious with NCDs, especially those offering unusually high returns.
Returns and Interest Structure
Returns are one of the biggest factors investors consider when choosing between bonds and NCDs.
- Bonds generally provide moderate and predictable returns. Government bonds usually offer lower interest rates, whereas corporate bonds may offer slightly higher yields.
- When compared to bonds, NCDs often offer higher interest rates, especially when issued by private companies.
Interest payments in both can be:
- Monthly
- Quarterly
- Annually
- Cumulative (paid at maturity)
If your priority is regular income, both instruments can work. However, NCDs come with the attraction of higher yields.
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Know moreRisk Factors You Should Keep in Mind
Risk is where the debate of bonds vs NCDs becomes most relevant.
| Type of Risk | Risk factors |
| Credit Risk | Bonds, especially government bonds, carry minimal credit risk. NCDs have higher credit risk, especially if they are unsecured. |
| Interest Rate Risk | Both bonds and NCDs are affected by changes in interest rates. When rates rise, the market value of existing bonds and NCDs falls. |
| Liquidity Risk | Some bonds and NCDs may not be easy to sell before maturity. |
Before you make an investment decision, it is quite important to understand these risks.
Liquidity
The term liquidity denotes how easily you can sell your investment before maturity.
- Bonds: Government bonds are generally more liquid. Especially the ones that are actively traded in the secondary market.
- NCDs: Liquidity depends on whether the NCD is listed and how actively it is traded.
Even though both bonds and NCDs can be sold before maturity, you may have to accept a lower price if market conditions are unfavorable.
Differences In Taxation
Taxation can significantly affect your net returns.
- It is based on your income slab that interest income from both bonds and NCDS is generally taxed.
- It is to be noted that capital gains tax applies if you sell them before maturity.
- Some bonds offer tax benefits. It may be tax-free interest or deductions, depending on their structure.
NCDs generally do not offer special tax exemptions. Thus, taxation is an important consideration in the bonds vs NCDs comparison.
Tenure and Investment Time Frame
| Instrument | Typical Tenure |
| Bonds | 10–30 years |
| NCDs | 1–10 years |
Since the tenure of bonds are for longer time periods, they are more suitable for long-term financial goals such as retirement planning. On the other hand, as NCDs come with shorter to medium-term tenures, they are preferred by investors with medium-term income needs.
Your investment horizon should align with the maturity period of the instrument you choose.
Bonds vs NCDs for Different Types of Investors
The needs of different types of investors will also differ. Thus, choosing between bonds and NCDs varies according to different investor classes.
- Conservative investors – They may go for bonds due to stability and safety.
- Income-focused investors – They may give preference to NCDs due to higher interest rates.
- Retirees – They might choose a mix of both for a steady income and risk balance.
- Young investors – They can use NCDs as part of a diversified portfolio for better returns.
There is no single solution that fits all types of investors in the bonds vs NCDs debate.
How to Choose Between Bonds and NCDs
Before deciding between bonds and NCDs, think about the following factors:
- Your risk tolerance
- Regular income or long-term stability
- How important is liquidity for you
- Your comfort level in evaluating credit risk
If safety is your first priority, bonds may be a better choice. On the other hand, if you’re willing to take a slightly higher risk for better returns, NCDs could be worth considering.
Common Myths About Bonds and NCDs
There are several misconceptions that investors often have:
- Myth: All bonds are completely without risk.
- Myth: Higher interest in NCDs always means better returns.
- Myth: One must hold these instruments till maturity.
Once you understand the reality behind these myths, making smarter investment decisions becomes pretty easy.
Key Takeaways
- Bonds and NCDs, despite being debt instruments, differ in issuer profile, risk, and returns.
- Bonds generally provide more safety, while NCDs offer higher interest rates.
- Credit risk, liquidity, and taxation should be carefully evaluated.
- The right choice depends on your financial goals, risk appetite, and investment horizon.
- Those looking for a balanced portfolio can include both bonds and NCDs for diversification.
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Know moreFrequently Asked Questions
What is the major difference between bonds and NCDs?
The major difference is in their issuer and risk profile. Bonds are generally issued by governments or large institutions, whereas NCDs are issued by companies and usually carry higher risk.
Are NCDs riskier than bonds?
Yes, in most of the cases. When compared to government bonds, NCDs generally have higher credit risk.
Can I sell bonds and NCDs before maturity?
Yes, if they are listed, you can sell them in the secondary market, based on liquidity and price fluctuations.
Which is better for regular income - Bonds or NCDs?
Though both can provide regular income, NCDs usually offer higher interest rates.
How are returns from bonds and NCDs taxed?
Interest income from both is typically taxed according to your income tax slab.
Are bonds suitable for long-term goals?
Yes, especially government and long-term corporate bonds, which are best suited for long-term financial planning.
Should I invest only in bonds or only in NCDs?
It’s generally better to diversify. A mix of bonds and NCDs can help balance risk and return.
