Fixed Income Glossary
Plain-language definitions of NCD, FD and REIT/InvIT investment terms.
FD
- Fixed Deposit (FD)
- A financial instrument where you deposit a lump sum amount with a financial institution for a fixed period at a predetermined interest rate.
- Depositor/Account Holder
- The person who owns the FD account and in whose name the deposit is made.
- Principal
- The original amount of money you invest in the FD.
- Tenure
- The fixed period for which the money is invested, ranging from 7 days to 10 years.
- Maturity Date
- The date on which the FD tenure ends, and the principal plus interest becomes payable.
- Maturity Amount
- The total sum received at the end of the tenure, comprising the principal and the interest earned.
NCD
- NCD (Non-Convertible Debenture)
- A fixed-income instrument issued by a company to raise debt from investors that cannot be converted into equity shares. The issuer pays a fixed or floating coupon and repays the principal at maturity.
- Debenture Trustee
- An entity (typically a SEBI-registered trustee company) appointed to protect the interests of NCD holders, monitor the issuer's compliance with the terms of the issue, and act on behalf of investors if the issuer defaults.
- Basis of Allotment
- The method used to allocate NCDs to applicants when an issue is oversubscribed — commonly first-come-first-served (FCFS) or proportionate allotment across categories.
- Shelf Prospectus
- A single prospectus filed by an issuer covering multiple future tranches (issuances) of NCDs over a period, so each individual tranche doesn't need a fresh full prospectus.
- Tranche
- One individual issuance under a shelf prospectus (e.g. "Tranche II"), each with its own coupon rates, tenors and issue dates.
- Oversubscription Option (Green Shoe Option)
- An option allowing the issuer to accept additional subscriptions beyond the base issue size if the issue is oversubscribed, up to a pre-declared shelf/overall limit.
- Put Option / Call Option
- A put option lets the investor ask the issuer to redeem the NCD early on a specified date; a call option lets the issuer redeem it early.
- Secured vs. Unsecured NCD
- A secured NCD is backed by a charge on the issuer's assets. An unsecured NCD has no such backing and ranks behind secured creditors.
- Credit Rating (for NCDs)
- An assessment by a SEBI-registered credit rating agency (CRISIL, ICRA, CARE, etc.) of the issuer's ability to repay on time. Higher ratings (e.g. AAA) indicate lower credit risk.
- Coupon Rate vs. Effective Yield
- The coupon rate is the stated annual interest rate on face value. Effective yield accounts for payment frequency and compounding, so it can differ from the coupon rate.
- MLD (Market-Linked Debenture)
- Returns linked to a market index or asset rather than a fixed coupon, subject to a participation rate and often a capital protection feature.
- Seniority
- An NCD's repayment priority relative to other debt: senior secured ranks highest, subordinated ranks last.
Interest and Returns
- Interest Rate
- The rate of return offered by the bank or NBFC, expressed as a percentage per annum (p.a.).
- Compounding Frequency
- The frequency at which the interest earned is added to the principal. Common frequencies are monthly, quarterly, half-yearly, or yearly. In India, many banks compound interest quarterly.
- Effective Yield
- The actual rate of return you earn, after accounting for the effect of compounding interest. It is higher than the stated interest rate if compounding occurs more than once a year.
- Cumulative FD
- In this type, the interest is compounded and paid only at maturity along with the principal. This option is best for those who do not need regular income.
- Non-Cumulative FD
- In this type, the interest is paid out periodically (e.g., monthly, quarterly, annually) and is not reinvested. This is ideal for those seeking a regular income, like retirees.
Rules, Regulations, and Taxation
- Tax Deducted at Source (TDS)
- Tax deducted by the bank on the interest earned if it exceeds a certain limit in a financial year (₹40,000 for general citizens, ₹50,000 for senior citizens). This deduction is as per Income Tax rules.
- Tax-Saver FD
- A special FD with a 5-year lock-in period that qualifies for tax deductions under Section 80C of the Income Tax Act, up to ₹1.5 lakh.
- Nomination Facility
- An option to appoint a nominee who will receive the maturity amount in case of the depositor's unfortunate demise.
- Know Your Customer (KYC)
- Norms introduced by the RBI to verify the identity and address of customers. This is a mandatory requirement for opening any FD account.
General
- YTM (Yield to Maturity)
- The total annualized return if held to maturity, factoring in purchase price, coupon payments, and time remaining.
- Face Value
- The nominal value per unit (commonly ₹1,000), used to calculate coupon payments — distinct from market price.
- ISIN
- A unique 12-character code identifying a specific security across exchanges and depositories.
- TDS on Interest Income
- Tax Deducted at Source; applicability varies by instrument — always check the specific issue's terms.
- Cumulative vs. Non-Cumulative Interest
- Cumulative compounds and pays at maturity; non-cumulative pays periodically and returns only principal at maturity.
Withdrawal, Flexibility, and Special Categories
- Premature Withdrawal
- The option to withdraw funds from the FD before the maturity date. It usually involves a penalty, which may be a lower interest rate than the contracted rate.
- Callable FD
- This is a standard FD that allows for premature withdrawal, often with a penalty. Most retail FDs are callable.
- Non-Callable FD
- An FD that does not allow premature withdrawals. In exchange for this lock-in, these deposits often offer higher interest rates.
- Senior Citizen FD
- A special category of FD that offers a slightly higher interest rate (usually 0.25% to 0.50% higher) to individuals who are 60 years of age or above.
- Loan Against FD
- A facility to avail of a loan using your FD as collateral. This allows you to get liquidity without breaking the FD and losing interest.
- Bulk Deposit
- A large-value deposit. Under recent RBI guidelines, banks are required to be transparent about the interest rates offered on such deposits.
REIT / InvIT
- REIT / InvIT
- REITs pool investor money into income-generating real estate; InvITs do the same for infrastructure. Both trade like listed securities and distribute income to unit holders.
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