The market value of India's corporate bond market is expected to be around US$645 billion for the fiscal year 2025 with 12.48% growth per annum from previous years, as per the reports published by CCIL and SEBI (February 2026). As the trend of reduced investments in fixed deposits increases, two financial instruments become relevant: NCDs and bonds. At first sight, these two securities are similar: both offer interest payments and have a specific maturity period; however, there are substantial differences between them.
What Is a Bond?
A bond is a financial instrument by which the borrower receives money from the lender. Hence, the borrower pays the coupon rate, which is the annual rate of interest paid on the total face value (nominal value of the bond) of the bond. At maturity, the issuer repays the face value of the bond to the investor.
Unlike the coupon rate, Yield to Maturity (YTM) offers a more complete measure of a bond's return by incorporating the purchase price, coupon payments, and time remaining until maturity. When a bond is bought at a premium above its face value the YTM will typically fall below the coupon rate. It is important to note that coupon yield, current yield, and YTM are three distinct measures and should not be used interchangeably.
A Non-Convertible Debenture (NCD) is a debt instrument through which companies and NBFCs raise money from investors. When investors purchase an NCD, they are effectively lending money to the issuer in exchange for regular interest payments and repayment of the principal amount at maturity.
The term “non-convertible” means that the debenture cannot be converted into equity shares of the issuing company at a later date. This distinguishes NCDs from convertible debentures, which can be converted into company shares under specified terms.
In India, the issuance and listing of NCDs are governed by SEBI’s Issue and Listing of Non-Convertible Securities (NCS) Regulations, 2021. Before issuing NCDs, companies are generally required to obtain a credit rating from a SEBI-registered credit rating agency such as CRISIL, ICRA, CARE Ratings, or India Ratings...
The Core Difference: NCD vs Bonds
While both instruments fall under the broader debt category, their structure, issuer profile, and risk-return dynamics can differ in ways that matter to investors.
| Parameter | Bonds | Non-Convertible Debentures (NCDs) |
|---|---|---|
| Definition | Bonds are a broad category of debt instruments issued by governments and companies. | NCDs are a specific type of corporate bond that cannot be converted into equity shares. |
| Issuer Type | Issued by governments, public sector entities, and corporates. | Issued only by companies, commonly NBFCs and other private entities. |
| Credit Risk | Government bonds are generally associated with lower credit risk, while corporate bonds vary based on issuer strength. | Credit risk depends on the issuing company’s financial health and credit rating. |
| Security Structure | May be secured or unsecured. Government bonds are backed by sovereign capacity. | Can be secured (backed by assets) or unsecured (based on issuer credibility). |
| Yield Characteristics | Typically offer relatively lower yields, reflecting lower credit risk in many cases. | May offer potentially higher yields, subject to credit and market risk. |
| Duration & Interest Rate Sensitivity | Prices may change based on interest rate movements, especially for longer-duration bonds. | Similar sensitivity to interest rate changes, with additional impact from issuer-specific risk factors. |
| Secondary Market Access | Generally more liquid, especially in the case of government securities. | Tradable on exchanges if listed, though liquidity may vary across issuances. |
| Retail Accessibility | Increasingly accessible through various investment platforms. | Accessibility has improved, with lower entry barriers and wider retail participation. |
Benefits and Associated Risks
Higher Yield Potential vs Credit Risk
NCDs may offer higher coupon rates compared to certain bonds. This reflects higher credit risk associated with corporate issuers. As a result, investors may assess whether the additional yield justifies the risk At the same time, this higher yield is linked to greater credit risk. Investors need to assess whether the additional yield compensates for the risk involved.
Fixed Coupon Payments vs Interest Rate Risk
Both bonds and NCDs typically provide scheduled coupon payments. However, their market value may change when interest rates move. When rates rise, existing instruments may see a price correction in the secondary market.
Diversification vs Liquidity Constraints
Including bonds or NCDs may help diversify a portfolio across asset classes. Still, liquidity varies. Some instruments may not trade actively, making early exit dependent on market conditions.
Credit Ratings vs Rating Limitations
Credit ratings provide a structured view of issuer risk.
Even so, ratings are not static. Changes in the issuer’s financial health may lead to rating revisions, affecting market perception and pricing.
A Quick Reference: NCD vs Bond
| Parameter | Government Bond | Corporate Bond / NCD |
|---|---|---|
| Issuer | Central/State Government, PSU | Companies (NBFCs, HFCs, corporates) |
| Credit Risk | Minimal (sovereign) | Varies with credit rating |
| Typical Yield | Lower (benchmark rate) | Potentially higher, subject to risk |
| Security | Sovereign backing | Secured or unsecured |
| Regulator | RBI (G-Secs); SEBI (listed) | SEBI |
| Secondary Market | Deep, liquid | Variable; NSE/BSE listed |
| Minimum Investment | ₹1,000 (RBI Retail Direct) | ₹1,000 (post-SEBI reform) |
Practical Takeaways for First-Time Investors
The distinction between NCDs and bonds can be understood through three aspects: risk, return, and liquidity.
- Investors may look at credit ratings to assess issuer reliability.
- Comparing YTM instead of just coupon rate provides a more complete picture of returns.
- Duration may help estimate how sensitive the investment is to interest rate movements.
- Secondary market access could influence flexibility if early exit becomes necessary.
Some investors choose to include a mix of bonds and NCDs, depending on their risk appetite and investment horizon. The choice often depends on how one balances yield expectations with credit risk and liquidity considerations.
Conclusion
NCDs and bonds have a common function; both are debt securities that involve periodic coupon payments, subject to the issuer’s financial performance. The differences include the issuer, credit risk, security arrangements, and regulatory regime. Both the government bond and the NCD issued by a mid-level NBFC are “bonds” in the general sense. However, they differ substantially in terms of risk and return characteristics.
Frequently Asked Questions
1. Why do NCDs differ from Bonds?
The key difference is in the structure of the two. NCDs are debt instruments offered by firms which cannot be converted to equity whereas bonds can have conversion options besides being offered by corporates and governments.
2. Are NCDs riskier than Bonds?
In comparison with government bonds, NCDs may be more risky since they involve credit risk but risk levels depend on the credit rating and financial position of the issuer.
3. What is Yield to Maturity in NCDs and Bonds?
Yield to Maturity (YTM) represents the total return that may be realised if the instrument is held until maturity, subject to issuer payments and market conditions.
4. Can one sell NCDs and Bonds even after issuance?
Both of these instruments can be sold after they have been bought; however, their liquidities may not be the same.
5. Are high coupon rates associated with good investment decisions?
It is not always the case. High coupon rates could suggest increased risks. Investors might analyse both yields and credit ratings together.
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