Finance

Fixed Deposit or Investment Bonds – Where Should You Invest?

One way to create wealth over the long-term is through investments. You have the option to select from several instruments, such as time deposits, mutual funds, equities, and debt securities, among others. Choosing the best investment avenue that delivers maximum returns is a tough decision.

You need to consider various factors while making your choice. The important aspects that drive your investment decision includethe investment amount, duration, risk appetite, and purpose.

Every product has its pros and cons, and you need to understand each instrument to choose the right option. Equity and mutual fund investments are subject to market risks. In comparison, bonds and deposits offer fixed returns on maturity, and deciding between these two options requires careful analysis of their features, benefits, and disadvantages.

Fixed deposits

Fixed deposits (FDs) offer a guaranteed return on maturity and are issued for a specified period. You may choose between cumulative and non-cumulative deposits wherein the former reinvests the interest while the latter pays the interest at regular intervals. Banks, non-banking financial companies (NBFCs), and companies issue FDs.

Investment bonds

Investment bonds are debt securities. Companies, financial institutions, and the government issue these instruments for a specified period.Bonds offer a fixed rate of return. When you invest in equity, you acquire partial ownership in the company. In comparison, investing in bonds does not provide ownership, as you are a lender to the issuer.

Comparing FDs and investment bonds

  FDs Investment bonds
Interest FD interest rates are higher Interest rates are lower than FDs
Interest payout frequency The investor can choose it No flexibility in interest payout frequency
Liquidity Pre-mature withdrawal may attract penalties The investor can trade it on exchanges  before maturity
Credit rating NBFC-issued FDs require a credit rating Must have a credit rating from at least one agency
Tax implications As per your tax slabs Applicable, except for tax-free bonds
Tax Deducted at Source (TDS) Applicable for interest exceeding INR 5,000 on corporate FDs

Applicable for interest exceeding INR 40,000 on bank FDs

Not applicable for listed bonds
Security Unsecured Secured against assets of the issuer
Loan Available for up to 95% of the FD amount Available up to 85% of the market value
Risk No risk as FD rates are fixed Subject to market risks

Factors to consider while making a decision

Before investing in either of the two products, consider the following aspects:

  1. Credit rating

FDs and bonds issued by companies and NBFCs requirea credit rating. Compare the credit rating of the two instruments to make an informed decision. Higher ratings imply a lower risk, and if all other factors are the same, opt for the instrument that has a better rating.

  1. Rate of interest

Comparing the fixed deposit interest rates and bonds’ interest rates is crucial. If you are looking to earn a regular income, opt for a non-cumulative FD with periodic payouts. However, if you want to build wealth over the long-term, an investment bond or a cumulative FD is a more suitable option.

  1. Company’s stability

Investing in fundamentally strong companies helps to mitigate investment risk. You must calculate the debt-equity ratio of the issuer to determine that the company does not have huge outstanding debts, which may make it difficult to repay the money on time.

If you are willing to take some risk and wish to diversify your portfolio to earn slightly higher returns, investment bonds are appropriate. However, if you have a low-risk appetite and wantguaranteed returns, you must opt for FDs. Before, investing check an online FD calculatoravailable on Mahindra Finance’s website to know your estimated returns after the TDS and other tax implications.