Should you invest in Fixed Deposits or Bonds?

Should you invest in Fixed Deposits or Bonds?

When it comes to investment options for the common man, the obvious options are Fixed Deposit, Equity, Mutual Funds, Bonds, Gold or Real Estate. Each investment option has its own merits and demerits.

Generally, for the fixed income category, fixed deposit, bonds and debt mutual funds are more popular. Since debt mutual funds consist of various bonds, nowadays many companies have come up to the public to advertise their bonds directly to offer higher returns.

While Fixed deposits and Bonds, are both lucrative investment options, there are several crucial distinctions between the two that might make one of them the right choice for you.

Security

The bonds can be secured or unsecured. The unsecured bonds offer a higher interest rate. However, in case of default, unsecured bonds do not get priority for the return of capital. On the other hand, fixed deposits are generally secured with insurance that offers a repayment guarantee through government. However, not all FDs are secured. There are limitations and constraints which you must cross check while you evaluate your investment options.

Liquidity

Technically, fixed deposit and bonds, both offer liquidity. If you want to liquidate the money before the maturity date, you can do so by incurring a small penalty in case of fixed deposits. To liquidate the bonds, you can sell it in a secondary market like BSE or NSE, through your demat account.

However, you will need buyers to purchase your bonds. Even if there are buyers, they offer much lower value, so most of the returns vanish for original investors. Apart from this, your broker will charge the brokerage for the transactions in the secondary market, which further brings down your real return.

Hence, on practical grounds, as far as liquidity is concerned, fixed deposit is a clear winner over bonds.

Returns

The concept of bonds is not very popular in India. To promote the same, many companies offer slightly higher interest rate as compared to bank Fixed Deposits. However, if you compare the returns offered for Fixed Deposits offered by reputed NBFCs (Non-Banking Finance Companies) like Bajaj Finance, the difference in returns is minuscule.

At the same time, such fixed deposits offer operational ease like doorstep services and clarity in rates, terms, and conditions. For precise returns, you can use online FD calculator to get a clear idea of returns from bond and fixed deposits.

Loans

It is much easier to take a loan against your Fixed deposit. In most cases, you will get the loan against FD from the same financial company as your fixed deposit. However, loans against bonds are not very popular, and the procedures are also unknown to many institutions.

Tenor

The fixed deposit is available in a variety of tenors starting from seven days. The maximum tenor could be ten years. However, for bonds, there is limited flexibility about tenors. You can sell in the secondary market, subject to buyer available.

Moreover, specific bonds are available for a limited time only, while fixed deposits are available on a perpetual basis, giving you the opportunity to plan and invest regularly.

In case of a fixed deposit, generally more tenor means more returns. Online FD calculators will throw more light on this fact. The same may not be the case with bonds, always.

Payment Frequency

The fixed deposits offer monthly, quarterly, half-yearly and yearly interest payment options. If you want to grow your money, you can select the cumulative fixed deposit option, when you can get a lump sum amount at the end of the maturity period. However, in the case of bonds, such options are very limited.

In a nutshell, fixed deposits score better than the bonds when it comes to safe investment and regular income. Some company bonds may provide good returns and rating. However, opportunity window is for the limited period. For small investors, fixed deposits provide more flexibility to open the account.

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