Fixed Deposit vs. Fixed Maturity Plan vs. Non Convertible Debentures (FD vsFMP vs NCD) In the current scenario, investors have a lot of choices available to them. While, on one hand, it helps investors in diversifying their holding and getting flexibility but, on the other hand, it also creates problem of information for them. In order to receive proper return on an investment, it is important that the investor is clear about the scope and risk proposition of various investment opportunities. The investors should also be aware of their own risk profile and should make investment choices accordingly.
Fixed Deposits:
This investment tool is generally offered by the banks. FDs are considered to be one of the safest avenues for investment. Accordingly, the return on the instrument is also considerably lower than the returns provided by riskier investment instruments such as equities. However, the return on the FDs is almost 100 percent certain and there is negligible risk of default. Further, the investors are able to set the tenure to suit their requirements. FD duration may be as short as for a few days to as long as 10 years. The investors may also choose to receive the accumulated interest on periodic basis or they may let the interest keep accumulating and receive it at the end of their tenure. This flexibility may help the investors in optimizing their tax liability as well. FDs are ideally suitable for people with low risk appetite. It is also suitable for people who need liquidity option with their investments. FDs can be liquidated without any considerable loan.
Fixed Maturity Plan:
Fixed Maturity Plan is another investment option for investors with low risk appetite. Fixed Maturity Plan schemes pose a little higher risk than Bank Fixed Deposits and consequently post higher returns too. These schemes are closed ended and therefore do not offer much liquidity. These schemes are debt like in their nature and park their corpus in fixed income securities. These schemes are available with different tenures ranging from one month to 3 years. Fixed Maturity Plan schemes do not engage in churning of their constituents and are less expensive than regular mutual funds. Once a plan portfolio is created by buying different fixed income securities, the participant securities are retained until the end of the scheme. These schemes end at a pre specified date, hence the nomenclature of Fixed Maturity Plan. These schemes have a lot in common with Bank FDs.
Non Convertible Debentures:
Non Convertible Debentures are also known as NCDs. This instrument is yet another investment opportunity for risk averse investors. These instruments are also able to deliver relatively high return than the regular fixed deposit schemes, in return to a little higher risk quotient. Non Convertible Debentures are issued by companies or Non Banking Financial Companies for the purpose of raising the funds. As per their names, Non Convertible Debentures are not convertible into equity. These instruments can be secured or unsecured. In case of secured Non Convertible Debentures, there is an underlying asset acting as a security for the debenture. If the company defaults on the redemption of secured Non Convertible Debentures, then the underlying assets may be sold and the proceeds may be used to repay the investors. However, there is no such inbuilt safety mechanism in case of unsecured Non Convertible Debentures. The return from Non Convertible Debentures comes in the form of coupon payments. These debentures are generally long term in nature and their tenure may range from 10 years to 20 years. This instrument is one of the most liquid instruments available in the markets. Non Convertible Debentures can be traded in the secondary markets. The market value of the debenture is generally based on its coupon rate. If the coupon rate is lower than the prevailing interest rate in the market, then the value of the debenture falls.
Choice of the Instrument:
Above illustrated instruments fall under the category of safe investment options. However, their risk profile still differs from one another. These instruments are suitable for different requirements. Out of the above three options, bank FD is the safest option whereas unsecured Non Convertible Debentures have the least security quotient. Consequently, FDs also offer lowest return rate while Non Convertible Debentures offer the highest. Fixed Maturity Plans lie in the middle as far as security and risk profile is concerned. Non Convertible Debentures are the most liquid investment option as its units can be easily bought and sold in the market. Fixed Maturity Plans offer the least flexibility as these units cannot be redeemed before the due date. FDs can be withdrawn before their due date with a little loss. Therefore, people with high liquidity requirements should invest in Non Convertible Debentures, which can be bought or sold in the open market, or in Fixed Deposits offered by the banks.
