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NBFCs raise funds by issuing different types of NBFC bonds to meet varied business and funding needs. As a result, NBFC bonds are not uniform and can be grouped based on how they are structured, the risk they carry, and how long they run.
NBFC bonds can be classified in multiple ways on the basis of their:
- Structure
- Return structure
- Asset backing
- Credit quality
- Tenure
This article offers a quick on the types of NBFC bonds in the market to help you understand what each option better and make informed investment decisions.
Understanding the Different Types of NBFC Bonds
We have listed the common types of NBFC bonds below:
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Based on Structure and Features
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Non-Convertible Debentures (NCDs)
Non-convertible debentures are the most common NBFC bonds. As the name suggests, these types of NBFC bonds cannot be converted into equity shares by the bondholder.
Key characteristics:
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- These NBFC bonds typically pay fixed interest
- Tenures usually between 1 and 10 years
- May be secured or unsecured
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Subordinated Debt
Subordinated bonds are yet another type of NBFC bond. These rank below senior debt in repayment priority, which increases the repayment risk. In other words, in the event of bankruptcy, these NBFC bondholders are repaid after senior creditors are repaid.
Key characteristics:
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- Carry a higher credit risk due to lower position in the repayment hierarchy
- May offer higher yields to compensate for the higher risk
- May be medium to long-term in tenure with no recall option
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Market-Linked Debentures (MLDs)
Market-linked debentures are structured NBFC bonds where returns depend on how well the linked market index performs during the bond’s tenure rather than a coupon rate.
Key characteristics:
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- Returns linked to market performance of indices like the NIFTY 50
- No assured interest payout
- These types of NBFC bonds can be classified into principal protected and non-principal protected options
- No-principal protected bonds may carry a higher investment risk due to added market risk
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Callable NBFC Bonds
Callable NBFC bonds allow the issuer to redeem the bond before maturity. Most issuers recall these types of NBFC bonds when interest rates fall and refinancing becomes cheaper.
Key characteristics:
- Early redemption right rests with the issuer
- Often offer slightly higher coupon rates to balance the recall risk
- Can create reinvestment risk for investors, especially in a falling interest rate scenario
Based on Return Structure
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Fixed-Rate NBFC Bonds
Fixed-rate NBFC bonds pay a constant interest rate throughout the tenure. So, you earn a fixed rate of interest on the invested principal.
Key characteristics:
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- Assurance of fixed coupon payments throughout the bond’s tenure
- Investors earn stable and predictable returns, making income planning easier
- May include long-term NCDs and short-term commercial papers
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Floating-Rate NBFC Bonds
Floating-rate NBFC bonds have coupons linked to a benchmark rate that resets periodically, helping reduce interest rate risk.
Key characteristics:
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- Interest adjusts with a benchmark rate, like the Repo Rate
- Lower interest rate sensitivity because coupon rates also change
- May offer better returns in rising rate environments
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Zero-Coupon NBFC Bonds
Zero-coupon NBFC bonds are issued at a discount and redeemed at face value at maturity. Unlike regular bonds, these types of NBFC bonds do not come with periodic interest payments.
Key characteristics:
- There is no coupon rate, so no regular income
- Returns are only realised at maturity
- May be useful for long-term goal planning
Based on Asset Backing
NBFC bonds can also be classified on the basis of whether they are backed by collateral or not:
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Secured NBFC Bonds
Secured NBFC bonds are backed by specific assets such as loan receivables or property. This asset backing provides higher recovery potential for the investor in case of default.
Key characteristics:
- Backed by assets of the NBFC
- Relatively lower risk compared to unsecured bonds
- May offer slightly lower yields
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Unsecured NBFC Bonds
Unsecured NBFC bonds do not have asset backing. This means, repayment depends entirely on the issuer’s financial strength.
Key characteristics:
- These types of NBFC bonds are not backed by an collateral and carry a higher risk
- They may offer higher yields to compensate for the higher risk
- The NBFC’s credit rating is essential to gauge the repayment potential of the bond
Based on Credit Quality
Independent credit rating agencies like ICRA and CRISIL rate the creditworthiness of NFBCs. Therefore, NBFC bonds can also be classified on the basis of their credit quality:
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AAA and AA-Rated NBFC Bonds
AAA and AA-rated NBFC bonds are issued by financially strong NBFCs and carry a lower probability of default. These bonds are generally preferred by conservative investors seeking stability over high returns.
Key characteristics:
- Strong credit quality
- Stable and predictable income
- Lower yield volatility
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BBB and Below-Rated NBFC Bonds (High-Yield Bonds)
BBB-rated and lower NBFC bonds are also called high-yield bonds. These NBFC bonds carry a low credit rating (BBB or lower) which means more credit risk. They offer higher interest rates to compensate for increased credit risk.
Key characteristics:
- These NBFC bonds offer higher yields of more than 11%
- May carry higher credit risk because high-yield NBFC bonds are issued by lower rated NBFCs
- May be suitable only for risk-tolerant investors
Based on Tenure
Here are the types of NBFC bonds based on the duration of investment:
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Short-Term NBFC Bonds
Short-term NBFC bonds usually mature within one to three years. These bonds are designed to offer better liquidity in the short-run.
Key characteristics:
- The shorter duration of the bond may make it less sensitive to interest rate changes
- May be suitable for near-term needs like funding a vacation
- Short-term NBFC bonds may deliver modest but fixed yields
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Long-Term NBFC Bonds
Long-term NBFC bonds have maturities of five to ten years or more. These types of NBFC bonds may be suitable for long-term income planning.
Key characteristics:
- These NBFC bonds typically carry a higher interest rate sensitivity due to a longer horizon
- May offer higher returns than bank FDs
- Can be secured or unsecured in nature
How to Choose Among the Types of NBFC Bonds?
When selecting from different types of NBFC bonds, investors should align choices with personal objectives. Here a few things you may consider:
- Income needs (monthly, quarterly, semi-annual, or annual)
- Risk tolerance
- Tenure preference
- Liquidity requirements
Wrapping Up on Types of NBFC Bonds
There are various types of NBFC bonds in India and before you invest, it’s helpful to assess their categorisations. Different structures, return profiles, and credit qualities offer varying levels of safety, liquidity, and yield. Understanding these differences helps NBFC bonds fit more effectively into a well-balanced investment portfolio.
Whether you wish to invest in a high-yield NBFC bond or consider AAA-rates bonds, you can check out the complete list of NBFC bonds on Goldenpi to start investing with ease!
FAQs on Types of NBFC Bonds
1. Which type of NBFC bond gives the highest returns?
High-yield NBFC bonds typically offer some of the highest returns. That’s because these bonds generally carry a lower credit rating, which makes them riskier investments. To balance the increased credit risk, issuers offer higher returns.
2. Are there types of NBFC bonds that offer regular income?
Yes. Fixed-rate NCDs, secured NBFC bonds, and monthly income bonds provide regular interest payouts.
3. How to choose the right type of NBFC bond?
The ‘right’ type of NBFC for an investor depends on the individual’s investment parameters. Here’s how you can choose a suitable type of NBFC bond:
- Assess your income needs
- Review your risk appetite
- Consider tenure preference
- Check the credit rating
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.
