Major lenders including State Bank of India, Axis Bank, HDFC Bank and ICICI Bank have announced multiple fixed deposit rate hikes in the past few months, thus, prompting many investors to put their money in FDs. However, investors also consider bonds for decent returns on investment. But which is a better investment option — bonds or FDs? Let's find out.
Most of us know about FDs. It is evident from the name that one must deposit a lump sum amount for a predefined tenure to avail of interest rates higher than those offered on regular savings accounts.
Bonds are also fixed-income instruments with an amount lent to a corporate or a government body. You may consider a bond as an “I Owe You” document acknowledging the existence of a debt. The document contains details of the loan and its repayment. Whether you should invest in a particular bond or not depends on the credibility of the issuing authority. This explains why government bonds are more creditworthy than those issued by corporates.
Bonds vs fixed deposits
Most investors rate fixed deposits safer than bonds though a lot depends on the reputation of the issuing authority. Tanvi Goyal, Founder, Wealth Aware, says, “Corporate bonds have two main risks associated with them, the risk of default of payment by the company, or the company becoming bankrupt. This is called ‘Credit Risk’. The other risk is that of a change in interest rates. So, if the bonds have a long maturity period and the interest rates go up in the economy, the value of the lesser interest-bearing bond will go down. These risks can be mitigated by spreading the investments over a large number of bonds via mutual funds, which will also give more liquidity to the investor in case they want to redeem. Fixed deposits are relatively safer but lack tax efficiency, as they do not provide indexation benefit, which debt funds are subject to.”
Adding to this, Suresh Sadagopan, Founder, Ladder7 Financial Advisories, said, “One needs to look at the issuer and the ratings for the instrument. Either can be good based on these parameters.”
Ultimately, it all depends on the investors’ understanding of investments and how they view them in light of their requirements. When it comes to safety, FDs are a lot better though the returns on their investments may be lower compared to bonds and other investment opportunities. Though bonds yield higher returns, one must be ready for the inherent risk involved in these instruments.