Bonds vs NCDs: Understanding the Key Differences

Consider a growing company, such as a mid-sized manufacturer, that needs funds to expand its factory. It turns to investors by issuing debt instruments that promise steady repayments with interest. This is where bonds and NCDs come into play, both ways for you, the investor, to lend money and earn returns.

Bonds are debt securities issued by governments or companies, where you lend money for a set period. They come with a face value (the amount repaid at maturity), a coupon rate (the interest paid regularly), and a maturity date (when the principal is repaid). Non-convertible debentures (NCDs), on the other hand, are unsecured bonds issued mainly by companies. 

What Are Bonds?

Bonds represent a loan you make to the issuer, whether a government or corporation. It is a fixed-income instrument in which the issuer agrees to pay periodic interest (via the coupon rate) and to return the principal (face value) on the maturity date.

Here's what stands out:

• Issued by diverse entities: Governments (like G-Secs for safety) or companies for business growth.
• Secured often: Backed by assets, lowering risk if the issuer faces issues.
• Traded easily: Buy or sell on secondary markets for liquidity.

Bonds suit investors seeking steady payouts, much like renting out warehouse space to a reliable tenant. They provide a structured way to earn from lending, with clear terms upfront.

What Are NCDs?

Non-convertible debentures (NCDs) are unsecured debt instruments issued by companies. An NCD is a promissory note acknowledging a debt, paying fixed interest without the option to convert into company shares, and maturing on a specified date.

Key points include:

• Unsecured nature: Relies on the company's credit strength, not specific assets.
• Higher yields typically: Companies offer better rates to attract lenders without security.
• Fixed tenure: Interest paid regularly, principal at the end.

NCDs appeal when you want potentially stronger returns from established firms. They offer a direct company lending route, emphasising the issuer's reputation.

Key Differences Between NCD vs Bonds

When exploring debt instruments, it helps to understand how non-convertible debentures (NCDs) differ from bonds. Bonds are a broader category of debt instruments, while NCDs are a specific type of corporate debt that cannot convert into equity. So, all NCDs are debt securities, but not all bonds are NCDs. 

Below is a practical comparison across key aspects that matter to investors.

1. Issuer Profile

NCDs: These are mostly issued by corporates, non-banking financial companies, and financial institutions.
Bonds: Bonds have a wider issuer base, including governments, public sector units, companies, and financial institutions.

Knowing the issuer helps you understand how they will repay their debts and the risks involved.

2. Security and Backing

NCDs: Many NCDs are unsecured, though secured options are also available.
Bonds: Bonds can be either secured or unsecured. Government bonds are backed by the government’s repayment obligation, offering lower risk.

When an issuer defaults, having security can affect how much you can recover. This makes it an important factor to consider when assessing risk.

3. Risk Level

NCDs: Credit risk can be higher, especially for unsecured or lower-rated issues.
Bonds: Risk varies significantly. Government bonds generally carry low risk, whereas corporate bonds depend on credit rating and security structure.

A higher interest rate does not necessarily mean a better investment; it may simply reflect higher risk.

4. Returns and Coupons

NCDs: These often offer attractive interest rates due to their non-convertible nature and, in many cases, unsecured status.
Bonds: Returns depend on type and rating. Government bonds tend to offer lower yields, while corporate bonds can provide moderate to higher returns.

It's important to evaluate yields along with credit quality and security instead of just focusing on the coupon.

5. Payout Structure

NCDs: Interest is usually offered in two ways: cumulative, where it accumulates and is paid at maturity, or non-cumulative, where you receive interest payments periodically.
Bonds: Structures can include bonds that require full repayment at maturity, callable bonds that the issuer can redeem early, or puttable bonds that allow investors to sell them back early.

Reading the terms carefully ensures alignment with your investment goals.

6. Liquidity and Trading

NCDs: Listed NCDs are tradable, but liquidity can be limited.
Bonds: Publicly listed bonds can provide clearer price information. However, the trading volume relies on the issuer and the size of the bond issue.

If early exit is a possibility, liquidity is as important as interest earned.

7. Tenure and Maturity

NCDs: Typically short to medium term, though longer tenures exist.
Bonds: Can range from short- to very long-term, including extended government securities.

Choosing a tenure that matches your financial horizon is critical to avoid locking in funds when they may be needed.

8. Use Case in a Portfolio

NCDs: Suitable for investors seeking potentially higher income, provided the credit risk is carefully evaluated.
Bonds: Ideal for stable cash flow and predictable returns, especially high-quality government or corporate bonds.

A balanced portfolio often works best, prioritising stability first, then incremental yield.

This comparison highlights the key differences between NCDs and bonds. It helps investors make informed choices that suit their financial goals and risk tolerance.

Each has its place, bonds for broader stability, NCDs for company-focused yields. Understanding these helps you pick based on your comfort with security.

Security: Asset-Backed vs Credit-Based

Security marks a core distinction in non-convertible debentures vs bonds. Bonds are frequently secured, meaning specific assets back your investment and offer recovery options if needed. NCDs, being unsecured, depend on the issuer's overall financial health and promise to repay.

• Bonds: Collateral, like property, provides a safety layer.
• NCDs: Trust in the company's cash flows and reputation.

Both approaches work well when you assess the issuer carefully. This distinction makes bonds more suitable for conservative investors, while NCDs suit those comfortable evaluating corporate credit quality.

Returns and Payouts

Returns are paid via coupon rates, semi-annually or annually, until maturity. Bonds often yield consistently from secure issuers, while NCDs may offer higher fixed returns to compensate for the lack of collateral.

Pointers to note:

• Frequency: Regular interest in your account.
• At maturity: Full face value returned.
• Tax treatment: Interest taxed as income (consult your advisor).

Bondbazaar makes it simple to buy bonds and track payouts, with zero fees and real-time trading.

In essence, both ensure predictable income, tailored to issuer profiles.

Liquidity and Trading Flexibility

Bonds shine in liquidity, trading actively on exchanges with wide selections, including over 10k options across categories on Bondbazaar. NCDs trade too, though volume varies by popularity.

• Secondary market: Sell at any time before maturity.
• Ease: Demat form means seamless transfers.
• Flexibility: Buy bonds or NCDs, even sell with a click.

This feature supports your need to adjust holdings. Liquidity keeps your options open, matching life's changing needs.

Corporate Bonds vs NCD: Understanding the Difference

A corporate bond is a debt instrument issued by a company to raise capital. A non-convertible debenture (NCD), on the other hand, is a specific type of corporate debt that cannot be converted into equity. While both represent company borrowings, the key distinction lies in their structure and features.

When evaluating corporate bonds vs NCD, investors should focus on:

• Credit rating – Indicates the issuer’s repayment ability.
• Security – Whether the instrument is secured or unsecured.
• Structure and repayment features – Include interest payouts and maturity terms.
• Liquidity in the secondary market – How easily the instrument can be sold before maturity.

Rather than relying solely on the labels “corporate bond” or “NCD,” comparing the details of each issuance provides a clearer understanding of risk and potential returns.

How Credit Ratings Matter For NCDs and Bonds?

Credit ratings are important when evaluating NCDs and bonds. They show how financially strong the issuer is and how likely they are to repay on time. Instruments with higher ratings usually come with lower risk, but there is still a chance of default.

Key considerations:

• Instruments with higher ratings usually yield lower returns due to lower risk.

• Instruments with lower ratings may offer higher yields but also carry greater risk.

Use credit ratings as a first step in your evaluation. Before making any investment, check the issuer's financial strength, the security features, and the terms of the investment.

When Should You Choose: Bonds Or NCDs?

Your choice hinges on goals. Bonds suit those prioritising asset backing and government reliability. NCDs are a good fit if you trust strong companies and seek enhanced returns.

Factors to weigh:

• Risk tolerance: Lower for bonds, credit-focused for NCDs.
• Income needs: Steady from both.
• Horizon: Match maturity to your plans.

Bondbazaar's SEBI-regulated platform, led by bond experts, offers a vast range to buy bonds matching your style.

Ultimately, both thoughtfully build your fixed-income base.

Risks to Keep in Mind

Every lender checks a borrower's balance sheet, just as you review issuers before investing.

Interest rate shifts affect both: rising rates may dip market value before maturity. Credit risk is key, bonds' security cushions it, and NCDs lean on issuer strength. Default risk exists but is managed via ratings.

Handle by:

• Diversifying: Spread across issuers.
• Checking ratings: Higher ratings indicate a stronger repayment likelihood.
• Holding to maturity: Locks in your returns.

Awareness empowers smart decisions without worry. Both remain solid for informed investors.

Conclusion

As you weigh NCDs vs bonds for your portfolio, remember that both serve as reliable tools for steady income from lending to trusted borrowers, such as governments and companies.

Whether you lean toward the asset-backed structure of bonds or the company-driven promise of NCDs, the key is to match them to your comfort level, goals, and issuer research. This choice lets you build a balanced fixed-income strategy that grows with time.

Ready to explore? Visit Bondbazaar today, SEBI-regulated with zero fees, real-time trading, and expert guidance to buy bonds or NCDs seamlessly. Start building your portfolio now!

FAQs

1. What is the main difference between NCDs and bonds?

NCDs are typically unsecured company debentures, while bonds often have asset backing.

2. Can I sell bonds or NCDs before maturity?

Yes, both trade on secondary markets, with liquidity determined by demand.

3. How do interest payments work for both?

Issuers pay fixed coupon rates periodically, directly to your account.

4. Which offers higher returns, bonds or NCDs?

NCDs generally provide higher yields to offset the lack of security, but it depends on the issuer.