Bond vs Fixed Deposit

Fixed Deposit

 

Fixed deposits (FDs) are one of the safest investment options, with relatively higher interest rates than regular savings accounts. Over a set period of time, interest accumulates on the deposited amount. The interest rate is determined by the type of lender (public sector, private sector, or small finance banks). Senior citizens are usually given higher interest rates. In an emergency, you can also easily liquidate your FD and obtain the funds.

 

Fixed deposits provide guaranteed returns. In contrast to market-led investments, where returns fluctuate over time, the returns on an FD are fixed when the account is opened. Even if interest rates fall after you open a fixed deposit, you will still receive the initial interest rate. FDs are considered far safer than other types of investments, such as equity.

 

 

Loan Against FDs

 

While FDs are fixed for a set period of time, you can borrow against them when you need money. Banks provide loans against FDs in the form of overdrafts, and you can typically borrow up to 90% of your FD amount. The advantage is that your FD continues to earn interest, and you don’t have to withdraw your FD prematurely and pay a penalty.

 

Types of Fixed Deposits

 

• Regular Fixed Deposits

 

The investor places his money in the FD account for a set period of time ranging from 7 days to 10 years, or an even higher period. The fixed and predetermined interest rate is higher than the interest rate on a regular savings account. Loan and overdraft facilities are available in exchange for standard FDs. You can also withdraw your funds before the account matures, but you will be penalized for doing so.

 

• Flexi Fixed Deposits

 

These FDs incorporate the convenience and flexibility of an FD and a savings account. They combine the features and benefits of FDs and savings accounts, so you get the higher interest rates of FDs as well as the liquidity of savings accounts.

 

• Tax Saving Fixed Deposits

 

These FDs have a mandatory five-year mandatory lock-in period, so you cannot withdraw your money before five years. Furthermore, loan and overdraft facilities are not available in conjunction with tax-saving FDs. However, under Section 80C of the Income Tax Act, you can claim tax exemptions of up to Rs 1.5 lakh.

 

• Fixed deposits for senior citizens

 

These are for people over the age of 60. They provide higher interest rates than traditional FDs. The length of stay here can range from 10 days to 10 years.

 

• Cumulative Fixed Deposits

 

These FDs allow you to choose the interval at which interest is compounded. The interest is added on to the amount you invested and is paid when the FD matures.

 

• Non-Cumulative Fixed Deposits

 

With these FDs, you can decide how often the interest will be paid out. It is a good investment for people who want a sustained income from interest.

 

Institution	FD Rates (p.a)	Tenure (Years)
Bajaj Finance Ltd (NBFC)	6.03%- 7.75%	1-5
SBI	2.90% – 5.4%	1-10
ICICI Bank	2.50%-5.60%	1-10
Axis Bank	2.50%-5.75%	1-10
HDFC Bank	2.50%-5.50%	1-10
RBL Bank	3.25%-6.30%	1-10
IDFC Bank	3.00%-4.65%	1-10
Punjab National Bank	2.90%-5.25%	1-10
Yes Bank	3.25%-6.25%	1-10

 

Who Should Invest in Fixed Deposits?

 

Fixed deposits are an option for investors who want to put their money somewhere with little to no risk. The investors know ahead of time how much they will get back from fixed deposits. So, changes in the market don’t hurt the returns on fixed deposits.

 

However, FDs are no longer as potent as they were 20–25 years ago. The goal of any investment is to increase the value of assets over time, but given the current interest rates and significant inflation, as well as the fact that someone in the highest tax band would be affected, it does not make much sense.

 

Key Takeaway

 

• Fixed deposits help reduce the risk in your portfolio
• Fixed deposits provide a guaranteed return when maturity occurs
• Flexibility in fund withdrawal
• Easy credit accessibility

 

By now, it should be obvious to you that FDs can be a wise choice for your financial portfolio. But keep in mind that FDs are ideal for short-term objectives.

 

Bonds

 

Bonds are financial instruments in which an investor lends money to a company or government for a set period of time in exchange for regular interest payments. The bond issuer returns the investor’s money when the bond matures. Bonds are often referred to as fixed income instruments because your investment earns a fixed coupon over the life of the bond.

 

Bonds are issued by corporations to fund ongoing operations, new projects, or acquisitions. Governments sell bonds to raise funds and supplement revenue from taxes. When you buy a bond, you become a creditor of the entity that issued the bond.

 

Many types of bonds, particularly investment-grade bonds, are less risky than equities, making them an important component of a well-diversified investment portfolio. Bonds can help to hedge the risk of more volatile investments like stocks, and they can provide a steady stream of income while preserving capital during your retirement years.

 

Types of Bonds

 

• Government Bonds:

 

These are bonds issued directly by the government. These are safe because the government of India is backing them. These bonds typically have a low interest rate.

 

• Corporate Bonds:

 

These are bonds issued by private companies. These firms sell both secured and unsecured bonds.

 

• Tax Saving Bonds:

 

Tax-saving bonds, or tax-free bonds, are issued by the government of India to provide individuals with tax savings. In addition to the interest, the holder will also receive a tax benefit.

 

• Zero-Coupon Bond:

 

A Zero-Coupon trades at a discount to face value and is also referred to as a Pure Discount Bond. It does not accrue interest over time. Your investment generates interest that is paid at maturity. You get the yearly return on the principal amount, which includes the interest and face value.

 

• Convertible Bonds:

 

This is a hybrid bond with the characteristics of both equity and debt, but not both at the same time. You can convert them into a set number of stocks and receive all shareholder benefits. As a result, you can benefit from both debt and equity at the same time.

 

• Inflation-Linked Bonds:

 

Inflation-Linked bonds are bonds that are crafted to provide protection against inflation. They are issued by the government and are indexed to inflation, so the principal and interest rates rise and fall in tandem with the rate of inflation.

 

• Sovereign Gold Bonds:

 

These bonds, issued by the Indian government, allow you to invest in gold, but you cannot possess gold in its physical form. The interest is tax-exempt, and the bond is perfectly secure. SGBs have an eight-year maturity period with a 2.5% interest rate, and there is no tax on interest income. After five years, the investment can be redeemed.

 

Bond Yield

 

Bond yield refers to the returns an investor will receive from investing in a bond. The annual coupon rate divided by the bond’s current market price is the mathematical formula for computing yield. As a result, the yield and price of the bond have an inverse relationship. When the bond’s price rises, the yield falls; when the bonds’ price falls, the yield rises.

 

These bonds can be purchased by opening a demat account on Kuvera. It is also a good idea to consult with your financial advisor before investing in bonds and deciding which ones to buy.

 

Who Should Invest in Bonds?

 

Those interested in investing in bonds in India will find a terrific chance with Kuvera to invest in India’s most trusted corporate and government bonds through debt mutual funds with ease and at the click of a button. Investors can select from a variety of corporate bonds with excellent returns and varying maturities. These bonds are regarded as safe investment havens and have been rated AAA by credit rating agencies, suggesting that they were issued by dependable, trustworthy corporations with very little or no chance of default. 

 

Corporate bonds

 

It is a wild assumption that equities are the only way to invest and build a solid portfolio for superior returns. But, market volatility and corrections such as those due to COVID-19 have opened many eyes when years of gains were wiped in an instant. This particular instance, and many others in the past, has made it a necessity for investors to consider diversifying their portfolio. Here comes the role of fixed income instruments such as bonds. It is pertinent to cushion your equity portfolio with such assets that could support your long-term returns for a rainy day. 

 

Perhaps such market volatility is enough to start asset diversification. If you have not yet considered asset allocation, it may be a good idea for you to do so.

 

On a platform like Kuvera, you now have access to –

 

• Direct Equities
• Equity Mutual Funds
• Direct Bonds
• Debt Mutual Funds
• Sovereign Gold Bonds
• Fixed Deposits from your bank

 

Investing in these assets for the purposes of diversification can augment the strength of any individual’s portfolio. 

 

Bonds vs. Fixed Deposits

 

 

Sno.	Bonds	Fixed Deposits
1.	A bond is a debt instrument that represents an investor’s loan to a borrower. In return, the investors receive regular interest income, and the principal amount is payable upon maturity.	A fixed deposit is a financial instrument in which an investor deposits funds for a specified period of time at a fixed interest rate. At maturity, both the principal and the interest are due.
2	Bonds are considered safe instruments. Some bonds, like gold bonds, are backed by physical assets. Furthermore, it is also critical to investigate the issuer’s credit rating.	FDs are also safe instruments, but they are not backed by physical assets. It is crucial to choose a secure institution to open an FD with.
3	Post-taxation bonds can offer better returns than FDs.	FD guarantees fixed returns.
4	It is necessary that bond issuers obtain a credit rating for their instrument from a credit rating agency like CARE, ICRA, or CRISIL.	NBFC-issued FDs must be rated, but banks and post offices are not required to provide credit ratings.
5	Investment in bonds can be undertaken digitally nowadays.	Investors can open a fixed deposit account quickly and easily at any bank, post office, or NBFC or through platforms like Kuvera.
6	In the event that the company declares bankruptcy and is subsequently liquidated, the bondholders will be paid out before any other creditors.	FDs are not backed by assets; however, the DICGC insures investors’ principal and interest up to Rs.500,000.
7	Interest income on bonds is taxable as per your income tax slab. It is important to note that investors in tax-free bonds that are issued by government entities such as PFC, REC, NTPC, IREDA, HUDCO, IRFC, and NHAI do not have to pay any taxes on the interest income they receive from those bonds.	Interest income on FDs is taxable as per your income tax slab. Moreover, TDS is deducted at a rate of 10% if interest income exceeds Rs. 40,000 or, in the case of elderly citizens, Rs. 50,000. Tax saving FD provides tax deduction upto Rs 1,50,000 under 80C

 

 

Corporate Bond

 

Companies issue corporate bonds to raise money for a number of projects, including the construction of new facilities, the purchase of equipment, or the growth of existing operations.

 

Corporate bonds typically have a maturity of more than a year and are medium-to long-term financial instruments.

 

Features

 

• Credit Rating Criteria: Depending on their credit rating, corporate bonds can be divided into two categories: investment grade and junk bonds. Investment Grade Bonds are those with credit ratings of AAA to BBB; all other bonds are classified as Non-investment Grade Bonds.

 

• Coupon Rate: Compared to G-secs, corporate bonds have greater coupon rates. Corporate bonds typically offer coupons ranging from 7 percent (AAA rated) to 12 percent (A-rated) in the current year through 2021. G-secs, on the other hand, offers a 6 percent coupon rate.

 

• Tenure: Corporate bonds have shorter tenures as compared to G-secs. Upon the maturity of a corporate bond, the investor obtains the principal amount. At maturity, the money is owed by the investor to the issuer and on the maturity period, the principal is repaid with any outstanding interest, and the contract gets settled.

 

• The liquidity of the corporate bond market is low to high, subject to the specific bond. Here, liquidity means the ease of selling the bonds without much price negotiation.

 

• Corporate bonds have an inverse relationship with interest rates, increasing in value when rates are low and decreasing in value when rates are high. Typically, the percentage of price volatility increases with maturity length. Since one will get the bond at face value or par value at maturity, holding the bond until maturity will reduce the concern for price changes, often known as market risk or interest-rate risk.

 

Corporate Bonds Valuation

 

Corporate bonds have an inverse relationship with interest rates, increasing in value when rates are low and decreasing in value when rates are high. Typically, the percentage of price volatility increases with maturity length. Since one will get the bond at face value or par value at maturity, holding the bond until maturity will reduce the concern for price changes, often known as market risk or interest-rate risk.

 

• An increase in interest rates renders older securities worthless since new market issues have higher yields than older securities. As a result, the prices will decrease.

 

• Decline in interest rates: As new bond issues enter the market, their yields are lower than those of existing assets, making older, higher-yielding securities more valuable. As a result, the prices will rise.

 

• Bonds can be sold before they mature if the price at the time of sale is high.

 

How to invest in bonds?

 

• The primary bond market is the place where bond issuers and investors transact.

 

• Bonds that were issued and bought on the primary market can be traded on the secondary market.

 

Here are three ways to put money into bonds:

 

• Through Brokers

 

Similar to how you buy stocks, most brokers also let you buy bonds. However, costs might differ significantly, and it can be difficult to study every option. Considering that each corporation might provide dozens of bond choices. Additionally, you must evaluate the bond issuer to make sure they can fulfill their obligations.

 

• Buying Mutual Funds and ETFs

 

Bond investments made through mutual funds or ETFs are very labor-efficient. You do not have to choose which bonds to purchase when you purchase a bond mutual fund or exchange-traded fund (ETF). Instead, the fund or ETF provider makes the selections for you and often groups them according to type or term. Making bond investing simple for you as a result.

 

• Purchasing Bonds via RBI Retail Direct

 

The Retail Direct program allows individual investors to buy government securities. Under this method, you can apply for a “Retail Direct Gilt (RDG)” Gilt Securities Account with the RBI. RDG account holders are eligible to take part in the primary issuance of CG, SG, T-bills, and SGB.

 

 

Bond vs Fixed Deposit: Which is Better?

 

Investment-grade bonds and fixed deposits are safer than equities. Both programmes offer a variety of alternatives with various terms, allowing investors to make both short-term and long-term investments. Depending on their needs, investors can also choose a combination of both for their portfolio diversity.

 

A fixed deposit, however, provides total protection and a guarantee of returns. Moreover, they are easily accessible. Bonds, on the other hand, may offer greater yields than fixed deposits when they mature. Bond prices could be impacted by interest rate changes, which are a risk associated with bonds. Bonds are also an option for individuals who have the time and market understanding to purchase these bonds over the counter.

 

So, when it comes to choosing between bonds and fixed deposits, the solution is in the investment objectives, investment horizon, and understanding of risk. These elements play a critical role in assisting investors in making wise choices.

 

 

Interested in how we think about the markets?

 

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