Difference between Non Convertible Debentures and Fixed Deposits
Debenture - A bond which is not secured by any asset or collateral is known as a debenture. Debentures are mostly long term in nature and at times the holder has an option of exchanging the debenture for stocks of the issuing company.
Debentures are again of two types-
Convertible debenture - Convertible debentures are those which can be converted into company stocks. These types of debentures generally command a lower interest rate when compared with non convertible debentures.
Non convertible debenture - Non convertible debentures are those which cannot be converted into company stocks. These types of debentures generally command a higher interest rate when compared with convertible debentures.
Fixed deposit- Fixed deposits can be held either with a bank or a company. It is an arrangement with a financial institution or an entity where the investor parks a fixed amount of money for a fixed period of time for which he gets a regular interest on a periodic basis. There is less risk involved because the amount of interest which is received by the investor is fixed and does not increase or decrease with market fluctuations. However, fixed deposit rates can fluctuate as per interest rates as governed by the Reserve Bank of India. The shortest duration of a fixed deposit is of two weeks while the longest can be 5 years. It is not very liquid in nature as the money which is invested in a fixed deposit gets locked-in and cannot be withdrawn before the maturity date. In case the investor wishes to break the FD or withdraw a part of money from it, it may attract a penalty from the bank.. Certificate of deposit is the most common example of a fixed deposit.
Difference between an NCD and an FD
- NCDs offer higher returns than FDs.
- NCDs, which are in demat form and are listed on an exchange, are not subject to TDS, unlike interest received from FDs which is taxable.
- NCDs are safer as they are backed by assets of the company. In case of a default, assets can be sold and money can be returned to the investor.
- NCDs are more liquid in nature when compared with FDs which attract penalty charges if funds are withdrawn before the maturity date.