Forget Bank FD, PPF and debt MFs! This investment will make you become rich, laugh all the way to the bank

Customary retirement schemes like Public Provident Fund or PPF, debt-mutual funds and bank fixed deposit or bank FD yield a lesser amount of money than this scheme.

NCD interest rate in the current market scenario is 9 per cent to 11 per cent which is much higher than bank FD, PPF or debt-mutual funds. Photo: Reuters

How to retire rich is a question that an earning individual begins to solve as and when she or he starts earning. If investors have zero risk appetite, the customary investment options available to accumulate retirement corpus are Public Provident Fund or PPF, debt-mutual funds and bank fixed deposits (FD). Investment in these options helps an investor grow money anywhere between 6.5 per cent to 8 per cent. However, there is one more option that can help boost profit and that too by as much as 9 per cent and the risk factor involved is low as well.

Asked about the retirement oriented investment that has low risk factor but higher returns than PPF, bank FD or debt mutual funds, Rahul Jain, Head, Personal Wealth Advisory at Edelweiss said, "Non Convertible Debentures or NCD give better returns than the customary PPF, bank FD or debt-mutual funds as the current rate of returns on the NCD is from 9 per cent to 11 per cent, which is almost at par with the equity mutual funds in mid-term investment." However, Jain said that the minimum investment in an NCD is generally Rs 10,000. The face value of NCD is Rs 1000 and investors have to subscribe a minimum of 10 NCDs.

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Jain went on to add that NCDs are long-term borrowings by corporates and are perceived to carry higher credit risk compared to bank FD. However, NCD compensates the investors adequately for the risk by paying a higher rate of interest and offering security in the form of collateral. There is no TDS applicable on NCD. NCD is borrowing by corporates. In that sense, it carries credit risk or default risk. Apart from this risk, there is also an interest rate risk which means the price of a listed NCD can reduce due to an increase in the interest rate in the economy.

Suggesting NCD as a retirement-oriented investment, Rahul Jain of Edelweiss said, "Ideally a retirement corpus should have a healthy mix of equity & debt depending on the time to retirement and your risk appetite. Allocation to debt should gradually increase as you near retirement as capital preservation becomes important than accumulation. At this juncture, you need a debt instrument that offers a higher inflation-adjusted return and NCD easily fit the bill compared to traditional forms of debt investments like bank fixed deposits and post office savings schemes."

On precautions, while choosing an NCD, Kartik Jhaveri, Director — Wealth Management at Transcend Consultants said, "An NCD has three types of rating — AAA, AA and A. AAA-rated NCD are considered to be the safest followed by ‘AA’ and ‘A’. As the ratings fall, the possible risk of default increases. While choosing the NCD, it's rating by the reputed credit rating agencies has to be check as it reflects the latest financial position of the corporate whose NCD is available for investment." He said that the rating of the NCD is regularly revised by the credit rating agencies too. So, it has to be checked regularly to avoid any kind of default of payment by the corporate.

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