The Difference Between Bonds and FDs You Should Know Before Investing
FDs, also known as fixed deposits, are fixed-income instruments, just like bonds, and are sought-after investments by investors with low risk appetites. Both of these investment vehicles offer investors a fixed interest income, but are vastly different from one another. In this article, let us look at the differences between FDs and Bonds, at a time when FD rates are going up, Bonds have the advantage of tax benefits.
What is a Bond?
A bond is essentially a loan made by an investor to a borrower. In return, the investor gets a regular interest income known as 'Coupon' at regular intervals. When the full tenure of the bond is attained (Maturity), the investor gets back the principal amount.
What is a Fixed Deposit (FD)?
A fixed deposit is a financial instrument where the investor deposits money for a specified time frame at a predetermined interest rate. The investor gets back the principal and interest amount once the FD matures.
Key Difference between FD and Bonds
Parameters | Bonds | Fixed Deposits |
Issued By | Companies, Municipalities, States, and the Government. | Banks, NBFCs, and Post Offices |
Safety | Bonds are considered safe as they are backed by physical assets. A Bond's rating should be checked before investing in a bond to determine its safety level | FDs do not have any backing by physical assets, and hence it is important to invest in FDs after thorough research about the issuing institution |
Liquidity | Bonds can be traded on stock exchanges, thus making them more liquid. The price of bonds can, however, be affected by changes in interest rates. In addition to liquidity, market volatility also comes with liquidity | Premature withdrawals from fixed deposit is possible for investors. Penalties or rate reductions may apply on premature withdrawals |
Interest Payment | Investors can select the interest payment. Payments can be half-yearly, annually or cumulative at the time of payment | Investors can only select the tenure, interest rates are usually fixed |
Return on Investment | Usually offer better returns than FDs, especially due to the post-tax benefit | Guarantees a fixed interest income and return of principal amount to investors |
Taxation | Bonds are taxed based on how long they have been held. Government institutions, however, issue tax-free bonds that do not have an interest income tax. | Individual income tax slab rates apply to fixed deposits. For senior citizens, TDS of 10% is deducted if interest income exceeds Rs. 40,000 |
Now that you know about the main differences between Bonds and Fixed Deposits, let us understand which is better
Investments in both bonds and FDs are considered safe, and both have multiple option plans with different tenures to choose from. This allows investors to invest as per their short-term or long-term goals. Bonds and FDs are also a great investment option for portfolio diversification.
One important thing to remember while choosing between the two is that Bonds are subjected to interest rate fluctuations, but on the other hand, provide higher returns on maturity when compared to fixed deposits, while FDs offers complete security and guarantee of return on investment.
Bonds vs fixed deposits, therefore, depend on the investment goals, time horizon, and understanding of risk. Investors need to consider these factors when making investment decisions.