Fixed Deposits & Bonds
Fixed deposits and bonds are two of the most popular investment options in India, favoured by conservative investors seeking stability, regular income, and preservation of capital. These financial instruments offer reliable avenues for wealth accumulation and are known for their relatively lower risk profiles compared to more volatile investments like stocks.
Fixed Deposits:
Fixed deposits, commonly known as FDs, are offered by banks and financial institutions. They involve depositing a lump sum amount for a fixed tenure at a predetermined interest rate. Here are some key features of fixed deposits.
- Steady Returns: FDs provide assured returns, and the interest rate is locked in at the time of deposit. This predictability makes them attractive for risk-averse investors.
- Liquidity Options: While FDs are relatively less liquid compared to some other investments, they usually come with premature withdrawal options, albeit with potential penalties.
- Interest Payouts: Investors can choose between receiving interest payouts at regular intervals (monthly, quarterly) or compounding the interest to be received at maturity.
- Safety: FDs offered by banks are considered safe due to the deposit insurance provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which covers deposits up to a certain limit.
Bonds:
Bonds are debt securities issued by governments, corporations, and other entities to raise capital. Investors lend money to the issuer in exchange for periodic interest payments and the return of the principal amount at maturity. Here are key features of bonds;
- Income Stream: Bonds provide a steady income stream through regular interest payments (known as coupons) over the life of the bond.
- Maturity Dates: Bonds have fixed maturity dates, at which point the issuer repays the principal amount to the bondholders.
- Variety: India offers a range of bonds, including government bonds, corporate bonds, and tax-free bonds. Each type carries its own risk and return characteristics.
- Ratings: Bonds are often assigned credit ratings by rating agencies, indicating the creditworthiness of the issuer. Higher-rated bonds are generally considered safer.
- Secondary Market: Bonds can be traded in the secondary market, providing investors with an opportunity to buy or sell bonds before their maturity.
Considerations:
- Interest Rate Risk: Fixed deposit interest rates and bond prices can be influenced by changes in prevailing interest rates. When interest rates rise, existing fixed deposits and bonds with lower rates may become less attractive in comparison to new investments.
- Inflation Impact: The returns from fixed deposits and bonds may not always outpace inflation, potentially eroding purchasing power over time.
- Tax Implications: The interest earned on fixed deposits is subject to income tax, while capital gains from bonds also have tax implications. Tax-free bonds, however, offer tax-exempt interest income.
