As an investor, you can think of bonds as a broader category of debt instruments, and NCDs as one type within it. Both bonds and NCDs pay investors a fixed interest rate + return the principal amount at maturity.
So, how do they differ? The primary difference lies in the “convertibility”. An NCD, as the name suggests, can never be converted into equity shares. In contrast, a convertible bond may be converted into equity (when the option is exercised by the issuer).
For more clarity, read this article to first understand both options individually and then check out some major differences between bonds and NCDs in India. Lastly, you will know about seven important factors to analyse before investing.
What are Bonds?
A bond is a fixed-income security. As an investor, when you buy a bond, you lend money to a company, government, or state. In return, the borrower promises to:
- Pay you back the original amount (or the principal) on a specific date
+
- Pay you interest periodically at a pre-determined coupon rate
Thus, as a bondholder, you become a creditor of the company. Now, be aware that each bond carries different provisions related to:
- Interest payment schedule (monthly, quarterly, or annually).
- Maturity period
- Security type (secured or unsecured by assets).
- Convertibility (convertible or non-convertible into shares).
- Redemption terms (callable, puttable, or fixed maturity).
You can find all this information in the prospectus/ offer document of a bond.
What are Non-Convertible Debentures (NCDs)?
An NCD is a “specific type of bond”. The main difference lies in convertibility. The term “non-convertible” means that these debentures cannot be converted into company shares or equity at any point. Thus, you always remain a creditor and can never become an equity shareholder.
Why NCDs May Be Less Risky Than Convertible Bonds!
NCD holders are considered “senior bondholders” (unless specifically subordinated). They may have a higher claim on the company’s assets compared to equity shareholders. In the event of liquidation or bankruptcy, NCD investors are repaid before equity shareholders receive anything. This repayment priority makes NCDs relatively safer from a recovery point of view.
Additionally, during times of financial distress, companies may convert convertible bonds into equity shares to raise capital and lower their long-term liabilities. While this helps the company survive, it exposes bond investors to equity risk.
Difference between Bonds and NCDs in India
Now, after reading out the individual meanings, you know that both bonds and non-convertible debentures (NCDs) are two different ways companies borrow money from investors. They may look similar at first, but they differ in terms of:
- Convertibility
- Security
- Risk level, and more
To better your understanding, check out the bonds vs. NCDs comparison table below:
| Feature | Bonds | Non-Convertible Debentures (NCDs) |
|---|---|---|
| Convertibility |
|
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| Security (backing) |
|
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| Interest (coupon) |
|
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| Risk Profile |
|
|
7 Factors You May Analyse Before Investing in 2025!
Investing in bonds or non-convertible debentures (NCDs) may add stability to your portfolio through volatility dampening. However, this can happen only if you know what to look for! Below are seven important factors every investor should evaluate before committing money:
1. Credit Rating of the Issuer
A credit rating reflects the issuer’s ability to repay its debt on time. Ratings are given by agencies like CRISIL, ICRA, or CARE. Higher ratings (AAA, AA, or A) may indicate stronger repayment capacity, while lower ratings (BBB or below) could signal higher default risk.
2. Security and Collateral
Check whether the bond or NCD is secured or unsecured. Secured issues are backed by company assets like property or receivables. In contrast, unsecured instruments rely solely on the issuer’s promise to pay.
As an investor, you may also read the offer document to see what kind of assets are pledged and their current valuation.
3. Issuer’s Financial Health
Beyond ratings, look at the issuer’s financial statements and try to understand its:
- Debt levels
- Profit trends
- Past track record
Usually, issuers with positive cash flows, moderate debt ratios, and consistent profits are comparatively safer.
4. Redemption and Exit Options
Review whether the bond or NCD has call or put options. For those unaware:
- A call option allows the issuer to repay early
and
- A put option lets you redeem early, if needed
Usually, these options are exercised when interest rates fall. You may understand these clauses before investing.
5. Bond Structure and Covenants
Every bond or NCD has clauses called “covenants”. These are rules the issuer must follow to protect investors. These covenants may:
- Limit how much new debt the company can take
- Restrict asset sales
- Require maintaining certain financial ratios
By reading these terms, you can understand how much control you have as a creditor.
6. Ranking in the Repayment Hierarchy
During liquidation, not all bondholders are considered equal. The repayment follows a specific hierarchy where:
- Senior bondholders get repaid first
- Then subordinated or unsecured ones
- And finally, equity shareholders
As an investor, you must know your bond’s position in this liquidation hierarchy.
7. Market Liquidity + Trading Volume
Even listed bonds and NCDs can be hard to sell. Thus, always check how actively they trade on exchanges like NSE or BSE. Usually, low liquidity means you may have to sell at a discount, which can lead to capital losses.
In Summary, All NCDs Are Bonds, But Not All Bonds are NCDs!
So now you know that “bonds” is a broad category, and NCDs are one of its types. The main difference between them lies in convertibility into equity shares. NCDs cannot be converted into equity, whereas a bond may or may not contain that clause.
Both, however, are fixed-income securities and allow investors to lend money to issuers in exchange for periodic interest. If you’re planning to invest, check out multiple options on the GoldenPi platform. Here you can explore a wide range of bonds and NCDs with details on yield, coupon rate, maturity, and credit rating.
Bonds vs. NCDs FAQs
Are subordinated NCD holders higher than equity shareholders?
Yes, subordinated bondholders can be divided into Tier III, Tier II (upper and lower), and Tier I bonds. All these debt products sit higher in the repayment hierarchy than Additional Tier 1 (AT1) bonds and equity shareholders. Thus, during liquidation, subordinated NCD holders may get repaid before them (though after senior bondholders).
How to buy NCDs online?
You can buy NCDs through platforms like GoldenPi, which lists options from various issuers. All you must do is complete your KYC verification, select your preferred NCD, and make the payment online.
How to interpret “credit rating outlook” changes?
A credit rating outlook shows the likely direction of a company’s credit rating over the next 6 to 12 months. A downgrade or even a “rating watch” is a red flag. Whereas, a change from “Stable” to “Negative” may signal that the company’s financial condition might be worsening (even if it hasn’t yet defaulted).
Does an NCD offer higher returns than convertible bonds?
No! NCDs usually offer lower returns because they don’t carry conversion or equity risk. Throughout the tenure of the bond, you will remain a creditor of the company, who has a superior right or claim over the company’s assets as compared to equity shareholders
Disclaimer:
This information is for general information purposes only. GoldenPi makes no guarantee on the accuracy of the data provided here; the information displayed is subject to change and is provided on an as-is basis. Nothing contained herein is intended to or shall be deemed to be investment advice, implied or otherwise. Investments in the securities market are subject to market risks. Read all the offer-related documents carefully before investing.
Bonds or non-convertible debentures (NCDs) are regulated by the Securities and Exchange Board of India and other government authorities. GoldenPi Securities Private Limited is a registered debt broker and acts as a distributor and not as a manufacturer of the product.
