Bharat Bond ETF Vs Fixed Deposit Vs Debt Funds: Which is better?

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Updated: December 14, 2019 5:15:05 PM

Bharat Bond ETF, bank fixed deposits and debt funds suit conservative investors who wish to save money without taking much risk.

 Bank FD or Bharat Bond, bank fixed deposits, Bharat Bond ETF, debt funds, Comparison, duration, safety, returns, How to invest, indexation, taxation, interest rate of bank FDsHere we compare bank fixed deposits, Bharat Bond ETF and debt funds in terms of their duration, safety, returns, buying process and taxation.

Bharat Bonds: After the launch of Bharat Bond ETF, the comparison with other alternative investments such as bank fixed deposits or debt funds is bound to take place. After all, all these three investments are debt-assets with no exposure to equities. Bharat Bond ETF, bank fixed deposits and debt funds suit conservative investors who wish to save money without taking much risk. Here we compare bank fixed deposits, Bharat Bond ETF and debt funds in terms of their duration, safety, returns, buying process and taxation.

1. Duration of deposit

In a bank fixed deposit, one can invest for a period as short as 7 days to as long as 10 years. Any premature withdrawal of FD may come with a penalty. In debt funds, which are open-ended schemes, there is no lock-in period and hence one can withdraw the money anytime without penalty. However, there could be an exit load in the scheme that needs to be accounted for. In the case of Bharat Bond ETF, there are two types – Bharat Bond for 3 years and Bharat Bond for 10 years. The two schemes will mature after 3 and 10 respectively but one may exit mid-way by selling the units in the stock exchange.

2. Safety

There is no explicit guarantee on the entire amount invested in all the three investments – Bank fixed deposit, debt fund and Bharat Bond ETF. In the case of bank FD, there is, however, an implicit guarantee that goes with the perception that the government will not allow banks to default on repaying its deposits. The bank deposits including money in a savings account, fixed deposit etc is guaranteed up to Rs 1 lakh per bank branch under Deposit Insurance and Credit Guarantee Corporation (DICGC).

Even in debt funds, there is no assurance or guarantee of returns and principal. The returns will depend on the underlying securities which could be money market investments or corporate bonds. It has been seen in the past that debt funds investing in corporate bonds are riskier than other debt funds.

In the case of Bharat Bond ETF, the safety is relatively more than most of the debt funds. Bharat Bond ETF will primarily invest in PSU bonds with AAA ratings, which makes them much safer than the debt funds holding corporate bonds. Holding Bharat Bond ETF till maturity makes them as safe as bank FD although no explicit guarantee exists.

3. Taxation

The interest income from bank FD is fully taxable in the hands of the investor as per one’s tax rate. So, for an investor in the highest tax slab paying 31.2 per cent tax, the post-tax return in a bank FD giving 6.5 per cent will amount to about 4.47 per cent. Similarly, for someone in the lowest tax slab paying 5.2 per cent tax and paying 20.8 per cent tax, the post-tax return will be 6.15 per cent and 5.15 per cent respectively.

In the case of debt funds and Bharat Bond ETF, the short term gains i.e. gains arising within 3 years are taxed as per individual’s tax rate as similar to bank FD. However, long term gains i.e. gains realised after holding units for more than 36 months are taxed at 20 per cent and that too after taking into account the benefit of indexation. So, irrespective of one’s tax rate, long term gains in debt funds and Bharat Bond ETF have a tax advantage over bank FD in terms of taxation.

4. Returns

Currently, the interest rate of bank FDs is around 6.5 per cent for the duration of 1 year to 10 years. Once invested in bank FD, the rate of interest is assured to the investor. However, investing in debt funds based on the returns as on date is not the correct way. The performance of debt funds in future will depend on several factors including the movement of interest rates in the economy. Further, there are varying types of debt funds, so comparison with the right fund is important. In the case of Bharat Bond ETF, as on December 5, the annualised yield on Nifty BHARAT Bond Index April 2023 was 6.69 per cent, while the annualised yield on Nifty BHARAT Bond Index April 2030 was 7.58 per cent. After adjusting for the expense ratio, for someone holding these bonds till maturity, the returns will be more or less in the same line as indicated.

5. How to invest

Investing in a bank FD is simple and just needs you to either go to your bank branch or open it online too. Some banks have started offering bank FD without opening a savings account. To invest in any debt fund of any fund house, one can go through the website of a mutual fund or through an intermediary. For investing in Bharat Bond ETF, one needs a Demat account or investment can be done through Edelweiss Bharat Bond Funds of Funds (FOF) by filling up the application form for it.

How to decide

Which of the three investments is better will depend on one’s income slab and specific need or goal. Depending on your need for the money, you can decide to choose between fixed deposit, debt fund and Bharat Bond ETF. Keep your tax bracket and goal into consideration while investing in any of these. And remember, for a regular and fixed income needs, the only option is bank FD, in which you may go for monthly, quarterly, half-yearly or annual income payments.

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