Bank FD or NCD: Which is the best option for retail investors

In the current scenario of rising interest rates with the economy grappling with decadal-high inflation, what would be the best investment option for retail investors who need an alternative to the ‘ever-loved’ fixed deposits? Direct investment in NCDs is the most logical alternative, ex – Public Issue of NCDs.

Which is the best investment for retail investors? An investment that high-return-low-risk combination perhaps? An investment vehicle that offers sky-high returns as quickly as possible without the risk of losing principal money period!

But unfortunately, such a combination doesn’t exist! Rather the ‘best investment’ would be the one that best matches one’s risk profile, and traditionally we Indians have been predominantly risk averse.
Speaking of traditions, of the lot, a few things you would most certainly find Indians engaging in – ‘Big Fat’ Indian weddings, a plethora of colourful festivals and our parents and grandparents parking their savings in fixed deposits (FDs, especially Bank FDs). What sparks this love affair between retail investors and bank deposits is simple – “one knows what they will receive when the FD matures” As per a
SEBI investor Survey completed in 2018, more than 95% of the households preferred to invest in bank deposits.

However, with an increasing risk appetite of common retail investors and general rise in financial literacy, the trend is changing, especially in the current scenario grappled by global macro headwinds which have kept the central banks around the globe busy tackling the decadal-high inflation levels by tightening their respective monetary policies.

Fixed deposits may be the most popular investment option in India, but they aren’t the best. In the current rising interest rate environment, plagued by high inflation, investing in bank deposits primarily is not enough to build a substantial corpus, as the returns get eaten into by tax and inflation rates and these are fairly large bites.

Also, the rates on these fixed deposits have not kept pace with rising interest rates. Though the RBI has raised the repo rate by 190 basis points since May, it has not been fully transmitted by banks into lending and deposit rates. Banks currently offer interest rates on 5-year fixed deposits ranging from 5.80-7.00%, but AAA rated NCDs offer much higher interest rates, making them more attractive than fixed deposits which makes a good case of retail Investors moving to invest in such NCDs.

The same is warranted from the overwhelming response garnered by National Highways Infra Trust’s (NHIT) public issue of NCDs in late October.

NHIT, the Infrastructure Investment Trust (InvIT) which operates Toll road assets, raised Rs 15 billion through 13-year, 18-year, and 25-year STRPP (Separately Transferable and Redeemable Principal Parts) bonds at 7.90% semi-annual coupon and was three times oversubscribed on the first day of their issuance. The public issue saw Retail participants submitting bids worth Rs 5.25 billion, exceeding the retail portion by 1.4 times.

The ability to diversify the investor base, instead of being restricted to the institutional investor segment only (which they access via issue of debt capital on a private placement basis) against the backdrop of tight systemic liquidity, augurs well for the issuers as well.

So far in the year, Indian corporates have raised Rs 41 billion between April and October this year and are expected to cross reach the Rs 100 billion mark by the close of FY23 with known issuers like L&T Finance Holdings and first-time issuers like Adani Enterprises Limited among others are expected to tap the bond market to raise debt capital via public issuance route in the coming months.

(Ajay Manglunia, MD & Head, Investment Grade Group, JM Financial Products Ltd)