When it comes to investing in fixed interest instruments, investors often choose fixed deposits or bonds as the preferred mode of investment. Both these instruments provide guaranteed returns after a fixed tenure. However, this is where the similarities end. Bonds and fixed deposits are different from one another. Let’s see how –
Difference between bonds and fixed deposits
- Fixed deposits are offered for varying tenures starting from 7 days and going up to 10 years. Bonds, on the other hand, are offered for longer tenures which can go up to 15 years
- Fixed deposits offer higher interest rates than bonds
- The interest earned from fixed deposits are taxable but in case of bonds if you choose tax-free bonds the interest earned is tax-free
- Investment in 5-year fixed deposits qualifies as deduction under Section 80C up to a limit of INR 1.5 lakhs. Investment in bonds, however, does not attract tax benefits only interest does.
- There is no limit on the amount of investment which can be done in fixed deposits. However, in case of bonds, retail investors have a maximum investment limit of up to INR 10 lakhs
- Investment in fixed deposits is secured up to INR 1 lakh even if the bank winds up operations. However, no security is available on bond investments
Which one is better?
To judge which is better, you should understand the pros and cons of both these investment avenues. So, let’s compare –
Advantages of fixed deposits over bonds
- Fixed deposits offer safer investment avenues as they are secured up to INR 1 lakh. Moreover, fixed deposits are offered by banks, post-offices and NBFCs which are more stable compared to companies which offer bonds.
- The term is flexible and you can also choose lower tenures for investment. In case of bonds, however, the tenure is longer and might not be suitable for investors looking for short-term investments
- Fixed deposits offer tax benefits on investments which is absent in case of bonds.
Advantages of bonds over fixed deposits
- Bonds are backed by the assets of company issuing it and so in case of liquidation bond investors are the first to be paid. Though fixed deposits are secured, the security is offered up to INR 1 lakh only
- A bond can be traded on a stock exchange. Moreover, bonds can also be transferred from one person to another. Fixed deposits, however, are not this liquid. You can partially withdraw from them but that incurs a penalty which reduces the effective interest earned.
- Interest earned from bonds is tax-free if it is a long term capital gain. However, interest from fixed deposits is always taxable.
- Bonds provide capital appreciation because their value increases with growth in the economy. In case of fixed deposits, however, there is no scope of capital appreciation.
So, understand the benefits and drawbacks of both these instruments before choosing one. Find out which instrument is suitable to your requirement and then make your choice. Both instruments have their pros and cons. Weigh these pros and cons and choose an option whose pros outweigh the cons.