Bonds and fixed deposits (FDs) are two options that frequently fit into the fixed income category. Both have certain advantages, like fixed returns and minimal risk

Investors who have a conservative risk tolerance frequently look for investments that are secure, safe, and yield consistent returns. Bonds and fixed deposits (FDs) are two options that frequently fit into the fixed income category. Both have certain advantages, like fixed returns and minimal risk, but they also have some differences.

What are bonds?

Debt instruments, known as bonds, are issued by governments or businesses to raise money. Upon buying a bond, you are effectively lending the issuer money for a predetermined amount of time in exchange for regular interest payments and the principal amount being returned when the bond matures.

What are Fixed Deposites?

Banks and other financial institutions offer financial instruments called fixed deposits, or FDs. You make a one-time deposit at a predetermined interest rate for a set tenure.

Returns of Bonds vs FD

States, companies, towns, and governments all issue bonds, which provide a range of options with various risk profiles. Because of the inherent credit risk, corporate bonds, also referred to as non-convertible debentures (NCDs), often offer higher returns.

Because there is no credit risk associated with government bonds, which are guaranteed by the sovereign, they are regarded as safer investments.

Conversely, because FDs are exclusively issued by banks, post offices, and financial institutions, they provide a reasonably safe option for investing.

Bond Returns

The two primary drivers of bond returns are 'coupon payments' or fixed interest payments made by the bond issuer and 'price appreciation or depreciation' in the secondary market.

Variations in interest rates, credit risk, and market conditions are just a few of the variables that can affect bond prices. Bond prices frequently increase (appreciate) in value when interest rates are lower, but they can also decrease (depreciate) in value when interest rates rise.

When an investor holds a bond until maturity, the yield to maturity (YTM) represents the total return they can anticipate, taking into account both coupon payments and possible price fluctuations.

Fixed Deposits Return

Bonds and fixed deposits differ primarily in their potential for return. Bonds generally yield higher returns, but they also carry certain risks, such as credit or interest rate risk, which change based on the bonds that are selected.

Although fixed deposits promise fixed returns, the interest you earn is subject to taxation, depending on your tax bracket. The way that banks tax FDs or bonds differs. Furthermore, fixed deposits make investing simple and secure, with minimum investment periods as short as seven days and guaranteed returns.

Liquidity In Bonds and Fixed Deposits

Bonds are examples of tradable, liquid assets on the secondary market. However, market volatility brought on by underlying interest rate risk usually coexists with this liquidity. Fixed deposits allow early withdrawals with some penalty fees, but overall, they offer more liquidity.

(Investment Is subject to market risk; please read all scheme related documents-carefully.)