Debentures vs. Fixed Deposits: What’s the Difference?

Discover the differences between debentures and fixed deposits. Make informed investment decisions with insights into their features and benefits.
Debentures vs. Fixed Deposits
3 min
15-April-2024

Fixed deposits and debentures remain the most popular investment options for risk-averse investors. Preferred for their relatively low-risk and stable returns, both FDs and debentures offer unique features and benefits to investors. While both offer fixed returns, they differ in terms of other parameters like risk, liquidity, and total yield to maturity value. Understanding the debentures vs. FD debate in detail can help you make an informed investment choice.

Also Read: Benefits of FDs as a Liquid Asset

Debentures vs. fixed deposits

As an investor, you need to understand the nuances of the debentures vs. fixed deposit debate to make the right investment choices that meet your investment objectives and help your portfolio grow. To help you do that, we have curated the following list of differences between debentures and fixed deposits:

Parameter

Debentures

Fixed Deposits

Meaning and structure

Debentures are debt instruments issued by corporations to raise capital. They are essentially loan agreements between the investor and issuer. You lend money to the issuer for a certain period, earning regular interest payments. The principal sum is returned on maturity.

Fixed deposits are a type of a type of savings instrument offered by banks and NBFCs where money is deposited for a fixed period and earns interest at a predetermined rate.

Interest rate

Interest on debentures can be fixed or floating. Fixed interest debentures pay a fixed interest consistently throughout the tenure, while floating interest rates are linked to a benchmark rate.

FDs earn a fixed interest rate that’s predetermined at the time of deposit. This rate remains fixed and unchanged throughout the tenure.

Issuer

Issued by private corporations for different purposes like project funding, debt financing, etc.

Issued by banks, post offices, and NBFCs.

Liquidity

Debentures offer good liquidity since they can be traded on the secondary market. However, prices and liquidity levels can be impacted by market volatility and prevailing interest rates.

Fixed deposits can be liquidated against premature withdrawal charges of 0.5%-1%. However, non-callable fixed deposits cannot be withdrawn before the end of the predetermined tenure.

Maturity

Debentures have long-term maturity tenures ranging from 1 to 10 years.

Fixed deposits typically offer shorter tenures ranging from 7 days up to 10 years.

Safety

Debentures can be classified into secured or unsecured groups. Secured ones are backed by the issuer’s assets while unsecured ones are backed by the creditworthiness (credit rating) of the issuer.

Bank fixed deposits are insured up to Rs. 5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

Risk

Higher credit risk associated with the creditworthiness of the issuer. Debentures with higher credit ratings are safer than ones with lower credit ratings.

Lower risk, safe investment options.

Returns

Debentures usually offer higher returns than fixed deposits.

Fixed deposits offer stable returns that are lower than debentures.

Tax implications

Income from debentures is taxed as per the applicable income tax slab. No TDS is applicable on non-convertible debentures held in Demat form.

10% TDS (20% for non-PAN FD depositors) on interest income is applicable if the annual interest earnings exceed Rs. 40,000 for regular depositors and Rs. 50,000 for senior citizens.


Based on this comprehensive debentures vs. fixed deposit breakdown, you can assess when the right time to invest in a fixed deposit is and when to pivot to debentures.

Conclusion

When deciding on the debentures vs. FD dilemma, it is essential to thoroughly assess your financial goals, risk appetite, and investment horizon. You should also consider factors like liquidity, tax implications, and credit guarantees while making an investment choice. Moreover, understanding macroeconomic factors like how the repo rate impacts FD rates can help you ascertain the right time to incorporate FDs into your portfolio.

That said, diversifying your investment portfolio can help spread and minimise risks while maximising returns. Balancing the potentially higher returns of debentures with safer FD investments can help your portfolio grow in a risk-managed way. You can maximise your FD returns by investing in corporate fixed deposits like the Bajaj Finance FD. Parking your funds in a Bajaj Finance FD allows you to enjoy high returns of up to 8.85% p.a. and tailor your investment to meet your financial objectives with flexible tenures and payout frequencies.

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Disclaimer

As regards deposit taking activity of Bajaj Finance Ltd (BFL), the viewers may refer to the advertisement in the Indian Express (Mumbai Edition) and Loksatta (Pune Edition) furnished in the application form for soliciting public deposits or refer https://www.bajajfinserv.in/fixed-deposit-archives
The company is having a valid Certificate of Registration dated March 5, 1998 issued by the Reserve Bank of India under section 45 IA of the Reserve Bank of India Act, 1934. However, the RBI does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.

For the FD calculator the actual returns may vary slightly if the Fixed Deposit tenure includes a leap year.