There are two types of investors – those who chase high returns at the cost of taking risks, and those who are happy with moderate returns but prefer to avoid risks. The second type of investor is conservative and looks for fixed-income instruments when it comes to investment. For such investors, bank fixed deposits and bonds are good options. With ITR filing season underway and taxpayers calculating their tax outgo, it’s worth mentioning here that both tax-saving FDs and bonds can help save on taxes.
In this story, we will look at various aspects, including features, of both these fixed-income instruments, as well as the differences and risks associated with them. Even though bonds and fixed deposits are low-risk options designed for conservative investors, they differ in several ways.
Bank fixed deposits offer guaranteed returns and deposit insurance up to Rs 5 lakh, ideal for risk-averse investors prioritising capital preservation, says KS Roy, a personal finance expert. “While FDs may offer lower returns than bonds, the latter can outpace FD returns over time and are now more accessible to retail investors with SEBI’s recent reduction of minimum investment to Rs 10,000,” Roy adds.
It’s important to know their differences and take an investment decision based on your financial goals and risk tolerance. Let’s compare both these saving instruments – FDs and bonds.
Also read: Fixed Deposits: Which banks are offering highest fixed deposit rates in July?
Fixed Deposits Vs Bonds – A quick comparison
FDs Vs Bonds – Definition:
Fixed deposits (FDs) allow investors deposit a fixed amount for a certain and pre-defined period to earn a guaranteed return. Banks, post offices, and non-banking financial companies launch FD schemes of specific durations, carrying different interest rates. On maturity, investors receive both the interest and principal. FDs also allow pre-mature withdrawal, though with penalties or reduced interest rates.
Bonds are debt instruments used by governments and private companies for raising money for various purposes like running operations, launching new projects, or acquisitions.
Fixed deposit interest rates Vs Bond yields:
Fixed deposits offer interest rates that are generally lower due to their low-risk nature. In comparison, bonds provide higher interest rates to investors who are willing to take on more risk.
FDs and bonds interest payment:
When it comes to interest payments, there are two main ways to get interest on fixed deposits. One is the cumulative option, where the interest is compounded quarterly and paid at maturity. The other is the non-cumulative option, where the interest is paid monthly, quarterly, or at maturity.
In the case of bonds, issuers borrow money from investors for a specific period, during which they make regular interest payments (monthly, quarterly or annually). When the bond matures, investors receive the principal amount they initially invested.
Also read: FD interest up to 9.5%! Fixed deposit rates revised by these banks across tenors
FDs Vs Bonds – credit quality
Credit quality is a key factor in determining FDs and bonds’ interest rates. For example, a bank rated AAA indicates the highest level of safety for timely servicing of financial obligations, carrying the lowest credit risk. This means you have a high chance of getting your FD money back with interest upon maturity. Similarly, bonds from issuers with low credit ratings imply higher default risk, and therefore, offer higher interest rates to attract investors.
Conclusion: Before embarking on an investment journey, it’s important to do a thorough research. In the case of both these instruments, you need to remember that unlike FDs, bonds carry varying levels of risk depending on the issuer’s creditworthiness.