# Top 10 NBFC Bonds

4 min read • Published 25 January 2024
Written by Anshul Gupta

NBFC bonds provide an alternative investment option to stocks and government bonds. We aim to offer an overview of these bonds, emphasising their characteristics and potential advantages for investors. We will delve into the definition of NBFC bonds and present our top 10 recommendations. So, without ado, let’s begin!

## What are NBFC Bonds?

NBFC bonds are an instrument issued by non-banking financial companies (NBFCs) that function similarly to banks in lending. However, unlike banks, NBFCs often utilise methods to raise funds, and one such method is through the issuance of NBFC bonds. When individuals and institutions purchase these bonds, they effectively lend money to the NBFCs.

In return, they receive interest payments until the bond reaches maturity. At that point, the initial investment amount is repaid. This arrangement allows investors to earn income through interest while providing NBFCs with the capital for their business activities.

## Who should invest in NBFC Bonds?

NBFC bonds are an option for investors who are willing to take on more risk and seek higher returns. However, if prioritising safety is your concern, bank-fixed deposits might be a choice. Ultimately, the decision depends on your risk tolerance and financial goals. If you feel comfortable with the possibility of yields in exchange for increased risk, considering NBFC bonds as part of your investment portfolio could be advantageous.

## Calculating The Yield of a NBFC Bond

Yield to Maturity (YTM) is a key metric showing the returns of a bond. It incorporates the annual interest you receive based on the coupon rate. The YTM can be calculated using this formula:

[Annual Interest + (FV−Price) / Maturity] / [(FV+Price)/2]

Where:

YTM = Yield to Maturity

Annual Interest = The coupon payment received annually.

FV = Face Value of the bond.

Price = Current Market Price of the bond.

Maturity = Number of years until the bond matures.

Consider a bond from Tata Capital Financial Services Limited with these characteristics:

Face Value: ₹1,000

Annual Coupon Rate: 10.15%

Annual Interest Payout: ₹101.5

Time to Maturity: 1 year (from 2023 to 2024)

Current Market Value of the Bond: ₹1,200

Using the formula, the YTM for this bond would be approximately 8.95%.

## Advantages of Non-Banking Financial Company (NBFC) Bonds

1. Interest Rates – NBFC bonds tend to provide better interest rates than fixed bank deposits, making them appealing to those seeking greater investment returns.

2. Credibility – Many NBFCs that issue these bonds are well established. Have financial backing along with high credit ratings. This enhances their credibility as an investment option.

3. Regulatory Oversight – The Reserve Bank of India (RBI) regulates NBFCs, which add oversight and supervision to the bonds they issue. As a result, these bonds are generally considered to carry risk.

## Drawbacks of NBFC Bonds

1. Inherent Risks –  Despite credit ratings and regulatory supervision by the RBI, NBFC bonds still come with risks, such as interest rate fluctuations and reinvestment risks.

2. Credit Risk – Since these bonds are primarily used by NBFCs to raise funds for lending purposes, there is a credit risk associated with them.

## Final Word

In conclusion, NBFC bonds present a balanced investment opportunity with the potential for higher returns compared to traditional bank deposits. They offer credibility and are regulated, yet they carry inherent risks like credit and interest rate fluctuations. Suitable for investors with a moderate risk appetite, they’re a good option for diversifying one’s investment portfolio.

### What are NBFC Bonds?

NBFC bonds are debt securities issued by Non-Banking Financial Companies to raise capital for their lending operations.

### Who Issues NBFC Bonds?

These bonds are issued by Non-Banking Financial Companies (NBFCs), which are financial institutions that provide banking services without meeting the legal definition of a bank.

### Are NBFC Bonds Safe?

NBFC bonds generally carry a moderate risk, depending on the financial stability and credit rating of the issuing NBFC.

### How are NBFC Bonds Taxed?

The interest income from NBFC bonds is taxable as per the investor’s income tax slab, and the taxation rules may vary based on the bond’s structure and terms.

### How to Calculate Yields of NBFC Bonds?

Yields of NBFC bonds, typically the Yield to Maturity (YTM), can be calculated using the formula that factors in annual interest, face value, market price, and maturity duration.

IIT Roorkee Alumnus and CFA with experience of structuring debt products worth more than 15000Cr for institutional and retail investors.

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