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Why Bonds are better than Fixed Deposit

June 20.2022
Yogesh Jha

Fixed deposit is one of the widely accepted instruments for investment in India and it’s not because Fixed deposit offer better return or safety, but I believe this is more traditional approach rather than lack of knowledge. To substantiate, we would like to highlight few important facts; 

Better Return: In the bank where someone deposits the money in fixed deposit also issue different types of bonds like AT I Bonds, Tier II Bonds. Someone, may say the bonds have some risk inherent. We agree but at the same time, in case of any eventuality, the fixed deposit is ensured only up to Five Lakh rupees per bank, which has been increased very recently. The same bank to whom you trust most, offers you the better return while investing in their bond. All the more, if market situation favours, you have the possibility to earn capital gains as well on their investment. Doesn’t it interesting to have a think on investing in the bonds or at least have a thought of diversifying your portfolio. Anyway, whether you aware or not, your investment in the MF Debt must have investment in the Bank Bonds. 

Multiple Options: Fixed deposit is being issued by Banks/Corporates only while in the bond market there are multiple players. So, you have larger landscape to choose from. Someone may ask, how to identify which is the best out of the available options. For them nothing to worry, all bonds are duly rated by the multiple reputed rating agencies like CRISIL, INDIARATING, etc. These ratings help someone to choose depends upon the risk appetite and upon individual choice. 

Liquidity:  Fixed deposits have a fixed maturity and have to pay penalty on premature payment. While in bonds, which we believe it is some part of portfolio, also gets liquidated on the exchange through us or through other regulated entities but it depends upon the market condition how much you will get on selling. It is quite possible you may earn capital gain while on selling you incur loss. So, we strongly recommend not to invest complete in the bonds but to keep a certain portion for the purpose of better yield. We hope you must agree with us. 

Capital Gains: As explained above, this is seriously an eye-catching quality of the instrument. Generally, the bond market behaves in a cyclical way. At present, the market is giving phenomenal opportunity to invest to earn high yield as well as high potential to earn capital gain. 

Taxation: In the case of fixed deposit, bank deducts TDS on the interest earned on the deposit while this is not the case with investing in the bond. However, that doesn’t mean you don’t have to pay the taxes on the interest earned but the taxes will be payable on the total income of individual as per the Income Tax Act.

We hope the above points will give you solid reasoning to think about investing in the bonds with us. 

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About IIB

We provide financial planning, advice and resources that investors need. As the financial industry evolves and customer needs become more complex, we have and continue to reinvent, innovate and transform ourselves to be ready for the financial landscape of tomorrow.

Our team is led by Bhavanand Kumar Mishra who has outstanding expertise in the Bond Market, Forex. He is M.B.A, certified associate of Indian Institute of Bankers, certified treasury professional holder from IIBF, Mumbai. He has worked as Chief Dealer in almost all asset classes especially in the Fixed Income in the treasury, with twenty plus years of expertise including overseas experience at London & Birmingham in U.K. in the Punjab National Bank, which is the second largest PSU Bank in India. Mr. Mishra is supported by a team of young professionals.

Why Do You Need To Invest in Bonds?

The size of Indian Bond market is increasing substantially year on year basis and so the opportunity also multiplies. Indian Bond market consists of Central Government securities (G-Secs), State Development Loans (SDLs), Treasury Bills, these securities are also called as Sovereign assets classes. Particularly State Development Loans is a higher yield asset class and suitable for the retail investors. State Development Loans (SDLs) maintains 25 to 50 bps spread from the G-Secs in the respective maturities however, these spread is not sacrosanct and may vary depends on the multiple variables.

As far as Corporate Bonds are concerned, Public Sector Undertakings like PFC, REC, NABARD, NHAI, etc, Private Companies, NBFC are issuing multiple bonds round the year having different maturities. These corporate bonds carry substantial spread from the G-Sec.

Generally, before investing in Bank/Corporate Fixed Deposit, depositors compares the rate of different bank's offered rate of interest and then decides where to invest in. Generally, investors don't give importance to the fact that their deposits per bank is secured only up to INR 5 Lakh. Further, if the individual left with additional surplus money, he/she chooses to invest in the Debt MFs. In the debt MFs, there are multiple entry or/and exit load and other charges which makes their return less profitable than their direct investment in the bond. At the end of day, Fund Managers of the Debt MFs invest in the bonds only which are available in the market.

Summary - The diversification of the investment portfolio is the key to manage hard earned savings. While we don't negate the importance of Bank's Fixed Deposit, but at the same time we also don't appreciate investing all the money either in the Bank/Corporate FDs or in the MFs. In the modern era, when all the information are widely and easily available, we must change the investing habits a little bit to earn more without putting any extra effort. Interestingly, investing in the bond is quite easier than our believe as everything can be done sitting at the home.

What are the Different Types of Investments?

Bonds are issued by organizations generally for a period of more than one year to raise money by borrowing. Following are the types of bonds:

  • Fixed Rate Bonds
    In Fixed Rate Bonds, the interest remains fixed through out the tenure of the bond. Owing to a constant interest rate, fixed rate bonds are resistant to changes and fluctuations in the market.
  • Floating Rate Bonds
    Floating rate bonds have a fluctuating interest rate (coupons) as per the current market reference rate.
  • Zero Interest Rate Bonds
    Zero Interest Rate Bonds do not pay any regular interest to the investors. In such types of bonds, issuers only pay the principal amount to the bond holders.
  • Inflation Linked Bonds
    Bonds linked to inflation are called inflation linked bonds. The interest rate of Inflation linked bonds is generally lower than fixed rate bonds.
  • Perpetual Bonds
    Bonds with no maturity dates are called perpetual bonds. Holders of perpetual bonds enjoy interest throughout.
  • Subordinated Bonds
    Bonds which are given less priority as compared to other bonds of the company in cases of a close down are called subordinated bonds. In cases of liquidation, subordinated bonds are given less importance as compared to senior bonds which are paid first.
  • Bearer Bonds
    Bearer Bonds do not carry the name of the bond holder and anyone who possesses the bond certificate can claim the amount. If the bond certificate gets stolen or misplaced by the bond holder, anyone else with the paper can claim the bond amount.
  • War Bonds
    War Bonds are issued by any government to raise funds in cases of war.
  • Serial Bonds
    Bonds maturing over a period of time in installments are called serial bonds.
  • Climate Bonds
    Climate Bonds are issued by any government to raise funds when the country concerned faces any adverse changes in climatic conditions.

What are Bonds and Debentures?

In general, Bonds and Debentures are interchangeably used in conversation but they have their own definition and characteristics related to them.

What Are The Different Types Of Bonds and Debentures In India?

Here is the list of popular Bonds and Debentures available in India.

  • Central Government Bonds
  • State Government Bonds
  • Municipal And Local Authority Bonds
  • Corporate Bonds
  • Public Sector Bonds
  • Tax-Free Bonds