What Are the Benefits of Investing in NBFC Bonds?

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The benefits of NBFC bonds have made them an increasingly popular fixed-income choice for investors seeking higher returns than traditional bank deposits. NBFC bond rates are often more attractive, which naturally draws interest from income-focused and conservative investors alike.

Apart from higher NBFC bond rates, their regular income flows, diversification perks, and tenure options also make them advantageous options. In this article, we discuss all these key benefits of NBFC bonds in detail as well as what to consider before investing.

NBFC Bonds Explained

NBFC bonds are debt instruments issued by Non-Banking Financial Companies to raise capital for lending activities and financing business operations. In return, you earn periodic interest and the principal is paid back at maturity. 

Some common types of NBFC bonds include:

• Commercial Papers (CPs)
• Non-Convertible Debentures (NCDs)
• Market-Linked Debentures (MLDs)
• Subordinated Debt
• Perpetual Debt
• Secured NBFC Bonds
• Unsecured NBFC Bonds 

Key Benefits of NBFC Bonds

With NBFC bonds explained, we can now move on to the key benefits of NBFC bonds. Let’s review the main benefits of NBFC bonds in detail:

1. Attractive Interest Rates

One of the most significant benefits of NBFC bonds is their higher yield potential. Compared to bank fixed deposits and government securities, NBFC bond rates are generally more competitive. 

Higher NBFC bond rates compensate for the slightly higher risks associated with these bonds. 

Why this matters:

• You can potentially earn higher returns than traditional FDs and bank bonds
• NBFC bond rates can range up to 13.7% meaning better portfolio returns
• Better NBFC bond rates may be especially beneficial in low or falling interest-rate environments

2. Portfolio Diversification

NBFC bonds help diversify investment portfolios that may otherwise be concentrated in equities, mutual funds, or bank deposits. Adding NBFC bonds introduces exposure to different sectors of the economy.

This diversification benefit of NBFC bonds means:

• Reduced concentration in only one type of fixed-income asset
• Lower dependence on equity market movements for overall portfolio returns
• Better balance between risk and return through fixed-income exposure
• Access to sectors like housing finance, infrastructure, and consumer lending where NBFCs operate

Because NBFC bonds are linked to lending and credit demand rather than stock market performance, they help spread risk across different parts of the financial system and reduce over-reliance on equity-driven returns.

3. Regular Income Stream

Another major benefit of NBFC bonds is predictable income. Most NBFC bonds offer regular (monthly, quarterly, or annual) interest payouts, making them suitable for income-oriented investors.

This benefit of NBFC bonds helps:

• Ensure regular cash flows with scheduled interest payouts at given frequencies
• Payout amounts remain fixed (if bond is issued against a fixed coupon), regardless of market conditions
• Creates a steady and reliable income stream, especially for investors like retirees who depend on regular income

However, it is important to note that this benefit of NBFC bonds is applicable only if the issuer remains solvent and does not default on payments.

4. Priority of Repayment for Secured Bonds

Another benefit of NBFC bonds is repayment priority, but this is only applicable to secured bonds. Secured NBFC bonds are bonds that are backed by collateral. 

In case the company experiences financial distress or bankruptcy, it’s remaining assets and money is distributed among the creditors. Secured bondholders rank high on this repayment hierarchy. 

This means:

• Secured bondholders are paid before unsecured creditors
• Higher probability of capital recovery if the company goes under

When considering this benefit of NBFC bonds, its important to note that if you are an unsecured NBFC bondholder, you will rank lower in priority on the repayment hierarchy. You will be repaid only after all secured debt and prioritised claims are repaid.

5. Wide Choice of Tenures 

NBFC bonds are available across multiple tenures and issuers, allowing investors to align investments with specific goals. This means, you can customise your NBFC bond portfolio with:

• Short-term options like Commercial Papers (CPs) with tenures typically ranging from 3 to 12 months
• Long-term instruments like Non-Convertible Debentures (NCDs) and Market-Linked Debentures (MLDs) with maturities extending up to 10 years or more

This benefit of NBFC bonds makes them suitable for different investors will varying goals and timelines. 

6. Popular Bonds have Good Liquidity and Exit Flexibility

One of the key benefits of NBFC bonds is liquidity. While they are fixed-income instruments, many NBFC bonds are listed on exchanges. This means:

• You can sell these NBFC bonds in the secondary market instead of waiting till maturity
• You can easily access your funds compared to long lock-in instruments
• You have greater flexibility to respond to your changing financial needs or market conditions

Key Considerations Before Investing in NBFC Bonds

As outlined above, there are several benefits of NBFC bonds. But before you start investing in NBFC bonds, here are a few key things you may consider:

1. Credit Ratings

NBFC bonds typically carry higher credit risk than bank bonds. That’s why checking credit ratings of the company before investing is important. These ratings are issued by credit agencies like ICRA and CRISIL to indicate the issuer’s creditworthiness, financial health, and ability to meet repayment obligations.

In terms of credit ratings, here’s what’s important to note:

• High credit ratings like AAA or AA indicate a lower risk of default 
• Lower ratings of BBB or BB indicate a higher risk of default
• Typically, lower-rated bonds may carry a higher yield rate to compensate for the additional risk

2. Interest Rate Sensitivity

NBFC bonds are debt instruments, which means they are impacted by interest rate fluctuations just like all other debt assets. Here’s what you should understand:

• NBFC bond rates will lower yields become less attractive when interest rates rise
• Prices of NBFC bonds may fall when market interest rates rise
• Fixed-rate NBFC bonds are more sensitive to interest rate changes than floating-rate bonds

But if you don’t plan on selling the bond before maturity, this factor won’t compromise the benefits of NBFC bonds much.

3. Liquidity Considerations

While liquidity is a chief benefit of NBFC bonds, it’s important to remember that not all NBFC bonds are listed on exchanges. Even if they are, ones from lesser known NBFCs may have lower trading volumes.

If you invest in a bond from a lesser known NBFC, one with a low credit rating, or simply one that has insufficient buyers in the secondary market, it will be difficult to sell the bond. You may even have to sell it at a discount, actually making losses on your investment.

4. Tax Treatment

Taxation can impact the net benefits of NBFC bonds. Here’s a detailed look at the tax aspect you need to consider before investing:

• Interest from NBFC bonds are taxed at slab rate
• Capital gains tax is applicable if you sell the bond before maturity

That’s why, it may be smart to consider the post-tax returns of NBFC bonds before investing, especially if you fall into a higher tax bracket. 

Final Thoughts: Weighing the Benefits of NBFC Bonds Carefully

From higher NBFC bond rates to diversification and predictable income perks, there are several benefits of NBFC bonds. A good way to make the most out of the benefits of NBFC bonds is to understand the risks and considerations before investing. This way, you can make a more balanced and informed decision.

If you’re a fixed-income investor who is ready to take on slightly higher risks for better NBFC bond rates, you can check out the list of NBFC bonds on the GoldenPi platform. 

Benefits of NBFC Bonds FAQs

1. What is the main benefit of investing in NBFC bonds?

The main benefit of NBFC bonds is higher interest income. NBFC bond rates tend to be higher than traditional fixed deposits and bank bonds. This means you can potentially earn better returns on your investment. 

2. How can I buy NBFC bonds?

You can invest in NBFC bonds through primary issuances when NBFCs raise fresh capital, or via the secondary market by buying already-listed bonds. 

Both options are available through SEBI-regulated Online Bond Platform Providers (OBPPs) such as GoldenPi, which offer transparent pricing and direct credit of bonds to your demat account.

3. What are the risks associated with NBFC bonds?

There are several risks associated with NBFC bonds, including: 

• Credit risk
• Interest rate risk
• Liquidity risk
• Regulatory risks
• Reinvestment risks

4. Do NBFC bonds offer fixed income?

Yes, NBFC bonds typically offer fixed income, which is one of the key benefits of NBFC bonds. They pay regular interest at a pre-defined rate, providing predictable cash flows and making them suitable for investors seeking stable income.

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 debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully.

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.