Bonds Vs Fixed Deposits

Looking to grow your money safely but confused between bonds and fixed deposits (FDs)? You are not alone. Many investors, especially first-time savers or those with conservative investment strategies, find it challenging to choose between these two popular options. Both offer stable returns and relatively low risk, but they are not the same. In this guide, we will break down everything you need to know: how bonds and FDs work, their key differences, returns, risks, tax rules, and when to pick one over the other.

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What is a bond? Definition and types

A bond is essentially a loan that you lend to a company or government. In return, they agree to pay you interest at regular intervals and return the full amount (called the “face value”) on a set date in the future.

Common types of bonds:

• Government bonds: Issued by the central or state governments. Examples: RBI Bonds, Treasury Bills, Sovereign Gold Bonds (SGBs).
• Corporate bonds: Issued by companies to raise capital. They may offer higher interest but come with slightly more risk.
• Convertible bonds: These can be converted into company shares at a later date, giving you a mix of debt and equity benefits.
• Floating rate bonds: Here, the interest rate is not fixed; it adjusts based on a benchmark like the RBI repo rate.

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What is a fixed deposit (FD)? Definition and types

A Fixed Deposit (FD) is a savings product offered by banks and NBFCs where you lock in your money for a fixed period and earn a guaranteed interest.

Common types of FDs:

• Bank FD: Offered by public or private banks. Comes with deposit insurance up to Rs. 5 lakh.
• Cumulative FD: Interest is paid at the end of the term, along with the principal.
• Tax-saving FD: Offers tax deductions under Section 80C but has a 5-year lock-in.

FDs are easy to understand and extremely popular among risk-averse investors.

Bonds vs FD: Key differences

Here is a quick comparison of how bonds and FDs differ on important aspects:

Interest rates and returns comparison

Both bonds and FDs offer interest, but the rates can vary based on market trends, issuer type, and tenure.

Example:

• A Rs. 1 lakh FD for 3 years at 7% p.a. gives you Rs. 1,23,000 on maturity.
• A bond offering 9% for 3 years would fetch Rs. 1,29,500 (assuming annual payout).

Credit, default, and insurance coverage

Bonds:

• Bonds are rated by credit agencies like CRISIL or ICRA.
• Government bonds are the safest; corporate bonds depend on the company’s financial health.
• No insurance coverage if the issuer defaults.

FDs:

• No insurance coverage.
• Backed by DICGC in case the bank fails.
• Safer for small and medium deposits.

Liquidity, redemption, and early exit penalties

Bonds:

• Can be sold in the secondary market (like stocks), depending on demand.
• May face price fluctuations if interest rates change.
• Some bonds come with a lock-in.

FDs:

• You can withdraw before maturity, but a penalty (usually up to 3 %) applies.
• No market risk, but less flexibility compared to listed bonds.

Bonds are more market-sensitive, while FDs are more stable but might underperform during high inflation.

Loan against investments (LTV comparison)

You can use both FDs and bonds as collateral for loans. Here’s how they compare:

Investment strategy: Combining bonds and FDs

Mixing bonds and FDs can give you the best of both worlds.

• Use FDs for short-term safety and predictable income.
• Use bonds for longer-term growth and inflation-beating returns.
• Allocate based on your age, goals, and risk comfort.

Example strategy: If you are 40, you might keep 60% in FDs and 40% in high-rated bonds to balance safety and returns.

When to choose bonds over FD?

Pick bonds when:

• You are okay with moderate market risk.
• You want higher returns than a bank FD.
• You plan to hold till maturity or understand how to sell in the market.
• You are investing for long-term goals like retirement.

When to choose FD over bonds?

Pick FDs when:

• You prefer guaranteed, fixed returns.
• You want to avoid market risks completely.
• You are investing for short-term goals (under 3 years).
• You need emergency access to funds with minimal hassle.

Conclusion

Both bonds and fixed deposits are strong options for conservative investors. While FDs offer safety and simplicity, bonds offer flexibility, tradability, and often better returns, if you pick wisely. You do not have to choose one over the other. Many investors build a strong portfolio by combining both.

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