What are Pros and Cons of Investing in NBFC NCDs 2025

In India, people who invest their money often want it to be safe and give them a regular income. Besides fixed deposits, government bonds, and mutual funds, there’s another option that’s becoming popular — Non-Convertible Debentures (NCDs).

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These are special investment products that many Non-Banking Financial Companies (NBFCs) offer to raise money. In return, they usually offer investors higher returns than banks do.

But just like any other investment, NCDs have both good and bad sides. So, let’s understand what NBFC NCDs are, why they are important, and what you should know about their advantages and disadvantages before investing.

What Are NBFC NCDs?

NBFCs borrow money from the public by issuing NCDs (Non-Convertible Debentures). In return, they promise to pay a fixed interest rate for a specific time. When that time is over, the company returns the original amount (called the principal). Unlike some other types of debentures, NCDs never convert into company shares. They remain loans that the company must repay.

There are two kinds of NCDs:

Secured NCDs: These are backed by the company’s assets, making them safer.
Unsecured NCDs: These are not backed by any assets, so they are riskier. To make up for that, they usually offer higher interest.

Companies like Muthoot Finance and others often issue NCDs. They are also listed on stock exchanges, which means investors can buy them either when they are first offered or later, just like buying or selling shares.

Why NBFCs Issue NCDs

NBFCs need steady funds to run their lending business and expand operations. By issuing NCDs, they avoid taking large bank loans or diluting equity. For investors, these instruments provide a way to earn fixed returns while diversifying beyond bank deposits and mutual funds.

Pros of Investing in NBFC NCDs

NBFC NCDs offer several benefits that make them attractive for retail investors in India.

1. Higher Returns
NCDs typically offer higher returns than bank fixed deposits. On average, NBFC NCDs offer 1.5%–1.75% higher rates compared to bank deposits. This makes them appealing for those who want to boost fixed-income returns.

2. Steady Income
NCDs provide fixed interest payouts, which can be monthly, quarterly, half-yearly, or annually. Investors who need regular cash flow—like retirees or salaried individuals—find this feature helpful.

3. Liquidity Through Trading
Listed NCDs can be traded on stock exchanges. If investors need money before maturity, they can sell their NCDs in the market. This makes NCDs more flexible compared to traditional fixed deposits, which often charge penalties for premature withdrawals.

4. Priority Over Shareholders
If an NBFC encounters financial difficulties, NCD holders are prioritised over equity shareholders in the settlement of claims. While this doesn’t guarantee safety, it offers a layer of comfort compared to direct equity investing.

5. No TDS on Interest
Interest earned on NCDs is not subject to Tax Deducted at Source (TDS). Investors receive the full payout, though they must declare it on their income tax returns.

6. Credit Ratings Provide Guidance
Before issuing NCDs, NBFCs undergo credit rating checks by agencies like CRISIL or ICRA. Ratings such as AAA or AA indicate stronger repayment ability, giving investors a way to judge the issuer’s credibility.

Cons of Investing in NBFC NCDs

Despite the benefits, NCDs are not risk-free. Here are some critical drawbacks.

1. Credit Risk
The biggest risk is default. If the NBFC faces stress, it may fail to pay interest or even the principal. Lower-rated companies often lure investors with very high rates, but they carry a higher chance of default.

2. No Equity Gains
Unlike convertible debentures, NCDs never convert into shares. Investors only earn fixed interest. If the company grows rapidly, NCD investors may not benefit from stock price appreciation.

3. Taxable Returns
Although there is no TDS, the interest earned is fully taxable as per the investor’s income slab. For someone in a higher tax bracket, post-tax returns may fall below what debt mutual funds or hybrid funds can deliver.

4. Inflation Risk
The returns from NCDs remain fixed. If inflation rises sharply, the real value of returns reduces. For long-term horizons, this risk becomes significant.

5. Liquidity Issues in the Market
Even though NCDs are listed, trading volumes are often thin. Investors may struggle to sell quickly or may need to sell at a discount if demand is low.

Pros and Cons at a Glance

Who Should Consider NBFC NCDs?

NCDs are good for people who want steady and predictable returns and are okay with taking a moderate level of risk. They’re a good choice for investors who want to earn a regular income and can keep their money invested until the end of the NCD’s term.

However, before investing, it’s important to check the company’s credit rating, see how financially strong it is, and compare interest rates with other options.

If someone wants complete safety with no risk, NCDs might not be the best option. And if someone wants to earn higher returns that can beat inflation, equity mutual funds or hybrid funds might be better choices.

Conclusion

NBFC NCDs can be a good way to earn higher returns and regular income, and you can even buy or sell them in the market for flexibility. But remember, they also come with risks, like the company not being able to pay back (credit risk) or your money losing value over time (inflation risk).

So, investors shouldn’t just go after the highest returns. It’s smarter to balance risk and reward, check the company’s credit rating, and make sure the investment matches their financial goals.