As interest rates continue to fluctuate amid ongoing geopolitical complications, such as the Trump tariffs and the Russia-Ukraine war, along with domestic factors like declining inflation, investors in the country face a timely question: Should you park your money in traditional fixed deposits (FDs) or explore investments in bonds?
Here are the five key factors to weigh before making that decision:
1. Returns and yield potential
- Bank currently offer investors interest rates ranging from 5.5% to 9% broadly. The final applicable interest rate on an individual basis depends on various factors, including the applicant’s profile, total loan amount, current credit score, and past repayment history.
- In stark contrast, certain , such as the Reserve Bank of India’s floating-rate savings bonds, provide investors with yields of up to 8.05%. This number gets revised every six months.
- The , on the other hand, offer investors returns in the range of 9.5% to 10%, depending on various factors such as the issuing institution and tenure.
Note: The interest rates discussed above are illustrative in nature. For the latest interest rates on fixed deposits and savings bonds, please visit the official websites of the respective lending institutions.
The key takeaway here is that generally, bonds provide higher yields, but they come with a higher risk of capital loss or longer lock-in periods. That is why aspiring investors should consult before investing in these asset classes.
2. Credit risk and safety
- FDs are insured up to ₹5 lakh per depositor per bank by the , making them a very sound investment option for aspiring investors.
- Bonds carry credit default risk, i.e., the issuer’s, whether corporate or government, ability to repay the investors. Credit rating agencies such as ICRA, CRISIL help in calculating and analysing this risk.
- Still, government-issued debt, i.e., bonds, enjoys sovereign backing, thus making them among the safest bond investments.
3. Liquidity and exit options
- Bank fixed deposits permit premature withdrawal, still it comes with conditions and the possibility of a penalty.
- Bonds, in contrast, are tradable in secondary markets. Still, their prices fluctuate and are influenced by changes in interest rates and inflation projections.
- For example, with floating rate bonds, there is no premature withdrawal, which is why you must be willing to hold them to maturity.
4. Interest rate risk and impact of inflation
- Bond prices can fall if interest rates rise, exposing investors to market risk, something FDs largely avoid due to their fixed nature.
- However, for bonds with floating coupons, your income may fluctuate with rising inflation or interest rate cycles. This can offer investors a partial hedge.
- Higher inflation can erode the real value of returns from both fixed deposits and bonds. Fixed-rate bonds can face price drops as interest rates rise. Whereas fixed deposits do retain stability, they still fail to outpace inflation.
5. Tax treatment of bonds and fixed deposits
- Interest from FDs, i.e., fixed deposits, is fully taxable at your income slab, with TDS applicable above certain thresholds.
- Bonds’ interest is also taxed similarly; however, (if you sell a long-term bond) may benefit from indexation. Some government bonds even offer tax-free gains at maturity, but the applicability of this benefit depends on the bond type.
- On a fundamental level, taxation on bonds depends on the kind of bond one aspires to invest in. That is why it is prudent to sit down with a certified financial planner and opt for the most tax-friendly bond after proper due diligence and consultation.
In conclusion, if you prioritise stability, simplicity, and insured capital, FDs can be a compelling choice, especially in uncertain markets. On the other hand, if you are aiming for higher yields and are willing to take on more risk, bonds can offer increasingly attractive returns; any decision in this regard must be taken after consultation with a certified financial advisor.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investment decisions should be made based on your individual financial situation and goals, preferably in consultation with a certified financial advisor. Past performance is not indicative of future results.