How Are Bonds Different From Fixed Deposit Scheme?

Bonds and fixed deposit schemes are investment vehicles that allow one to earn income on their investments through interests. Moreover, both these investment instruments come with a lock-in period. However, despite such similarities, bonds and fixed deposits differ markedly across several parameters, the knowledge of which is critical for prospective investors.

Difference Between Bonds And Fixed Deposit Schemes:

In order to comprehend their differences, investors must have a fundamental understanding of each investment option.

What Are Bonds?

Bonds are a type of debt instrument that allows a borrower to raise funds from individual investors. Entities, such as municipalities, governments, and companies, issue bonds for different projects in primary markets. The issuer then uses the collected corpus to finance business operations or infrastructural development.

Furthermore, investors buy bonds at principal or face value. Issuers offer interest against the same at a fixed or adjustable rate. Moreover, an investor acquiring bonds gains financial and legal claims to the issuing entity’s debt fund. As a result, he/she will receive the entire face value of bonds after the term expires.

What Are The Features And Benefits Of Bonds?

Bonds in India have a number of features and benefits, some of which are mentioned below:

  • Bonds extend the scope for capital preservation, which enables investors to earn substantial financial gains.
  • Interest rates on bonds are higher than those offered on fixed deposits.
  • Interest earned from investment in bonds is subject to taxation depending on the type of bond and its holding period.
  • Bonds can be resold to another purchaser later on.
  • Investors do not have the leeway to choose the frequency of interest pay-outs. One will receive returns at a specific time.
  • Although bonds are secured, they are not insured. This implies that investors do not have absolute safety. And, if a bond goes unpaid, they only have rights over the issuer’s assets submitted as collateral.
  • Bonds may or may not have flexible tenure.

What Are Fixed Deposit Schemes?

Fixed deposits are a financial instrument that allows an individual to deposit a lump sum amount with a financier. As their name suggests, these are ‘fixed’ for a particular and pre-decided tenure. During this period, one earns the interest on his/her deposit through its duration. Interest pay-outs can also be quarterly, monthly, annually, or cumulative.

Moreover, the rate of interest depends on the rate at which one locks in the deposit. Therefore, changes in interest rates or market fluctuations have no effect on interest rates, which enables FDs to offer guaranteed returns. Additionally, fixed deposit schemes are an ideal instrument for investors who are averse to taking risks.

What Are The Features And Benefits Of Fixed Deposit Schemes?

Fixed deposit schemes have their own set of features and benefits, some of which are highlighted below:

  • Fixed deposits are issued by various financiers, such as post offices, banks, and NBFCs.
  • Investors can choose the frequency of their returns. For instance, a non-cumulative fixed deposit offers monthly returns. On the other hand, investors can receive lump sum interest after maturity on a cumulative fixed deposit.
  • Fixed deposit schemes allow individuals to earn more on their savings as compared to a savings account.
  • They offer a balance of returns and safety, which makes them a viable investment instrument.
  • Interest on fixed deposits is taxable per one’s slab rate alongside applicable cess and surcharge.
  • Fixed deposits also enable one to meet urgent cash requirements with facilities like a loan against FD.

The table below elaborates on the difference between bonds and fixed deposit schemes:

Parameter

Bonds

Fixed Deposits

Safety

Bonds are secure because physical assets back them. However, a bondholder may not receive timely principal pay-out and interest if the issuer’s credit rating is low or deteriorates.

Fixed deposits are secure investments as they offer assured returns. Investment is safe with a credible issuer with a high credit rating.

Returns

Bonds offer fixed pay-outs on maturity. However, they offer an additional scope to investors for earning capital gains as their prices change based on fluctuations in market interest rates and the creditworthiness of issuers.

Fixed deposit schemes offer guaranteed returns with predetermined interests. As a result, they do not provide any scope to earn capital gains.

Frequency Of Pay-outs

The issuer returns the principal amount on a bond’s maturity date and pays interest at predetermined intervals.

Returns on fixed deposits are paid out per an investor’s choice. One can opt for annual, half-yearly, monthly, or quarterly pay-outs.

Credit Rating Of Issuers

Bond issuers must be rated by a minimum of one rating agency among ICRA, CRISIL, or CARE.

It is mandatory for NBFCs to be rated. However, there is no such mandate for banks offering fixed deposit schemes in India.

Taxation

Interests earned on bonds are subject to tax depending on the type of bond. For instance, an investment in the government’s tax-free bonds is exempt from tax.

Interest on fixed deposits is taxable per one’s income slab rate alongside applicable cess or and surcharge.

Furthermore, when planning to invest in bonds, investors can turn to KredX. We have a diverse range of bond offerings. One can invest in bonds of their choice in just a few clicks.

Both bonds and fixed deposits are sound investment choices for risk-averse investors. However, a comprehensive understanding of each of these instruments and their differences will help investors make informed investment decisions.

Frequently Asked Questions:

A. Although rare, one may suffer a loss if a financial institution applies for bankruptcy or liquidation.