When you have some extra money to save, you want it to grow. You have many places to put that money, but two very popular options are Fixed Deposits (FDs) and corporate bonds. Some people think they are the same because they both involve fixed income. But they are very different, and one may be better for you than the other.
So, the obvious question begs: which one gets you more in return? The solution is not that easy, because it’s a balance between how much you can make and how much risk you want to take. In this post, we will compare FDs and corporate bonds in India so that you can make an intelligent move with your money!
1. What Is a Fixed Deposit (FD)?
Fixed deposits are a lot like bank savings accounts. You put a lump sum of money into it for a fixed amount of time, like 1 year, 3 years, or 5 years. In exchange, the bank offers you a fixed interest rate on that cash. When time is up, you get your money back, plus the interest you earned.
- Safety First: One reason everyone loves FDs is that they’re very safe. Your money is protected. The DICGC insures up to ₹5 lakhs of your money lying in an FD with a bank in India. That is, even if the bank has an issue, up to that amount, your money is safe.
- Assured Returns: Interest is fixed from the beginning. So you know exactly how much money you will receive in the end. It has no surprises, so it can be a great option for someone who wants to be very careful with their money.
The catch? The returns on FDs are usually lower than those of other types of investments. They are a safe way to grow money, but they might not give you the highest returns.
2. What Are Corporate Bonds?
When you purchase a corporate bond, what you’re doing is lending money to a company. The company needs money to expand its business, and it turns to people like you for a loan. In exchange for your loan, the company agrees to give you back your money at the end of some period and also to pay you a fixed interest at specific intervals, say every six months or once a year.
- Opportunity for higher returns: The primary reason people invest in corporate bonds in India is an opportunity to earn higher returns. The company does this by paying you a small amount more (₹100, in this example) than it is borrowing the money from you for. That little bit extra is called the interest rate. Because there’s slightly more risk involved (the risk that the company won’t actually repay you), a company usually has to offer a better interest rate than a bank FD. This makes it very attractive for investors who want to make more money.
- Liquidity: Unlike an FD, where you have to pay a penalty to take your money out early, you can sell a corporate bond in the stock market before it ends. That makes bonds more flexible if you suddenly need your money back.
- For the Savvy Investor: For a slightly more risk-tolerant investor looking to create a diversified portfolio, an investment in Indian corporate bonds is wise.
The catch? Bonds are not insured. Should the company go out of business and not manage to pay back your loan, you could lose money. This is why the company’s credit rating (e.g., AAA or AA) is so important to look at, as it tells you how safe that regular bond offering really is. The higher the rating, the safer it is.
3. Which One Gives Better Returns?
In most cases, corporate bonds in India offer better returns than FDs. This is because they come with a little more risk. The rule of thumb in investing is higher risk, higher potential return. FDs are low-risk, so they give lower returns. Corporate bonds are a bit higher risk, so they give higher returns.
For example, a bank might offer you a 6% return on an FD, while a good company’s bond might offer you 8% or more. The difference might seem small, but over a few years, it adds up to a lot of money. The company Stashfin is an expert at helping people manage their money and loans, and just like you need to be smart about a ₹30,000 personal loan, you need to be smart about your investments. The choice between bonds and FDs is a great example of this.
4. How to Choose Between Them
The right choice depends on you and your financial goals. Ask yourself these questions:
- What is your goal? If your goal is to save for a big expense in a few years and you can’t risk losing any money, an FD is a better choice. If you want to grow your money for a longer period and can take a little more risk, then corporate bonds might be a good option.
- Are you okay with some risk? If you are a very careful investor and want to put your money in the safest place, go with an FD. If you are willing to learn and take on a little more risk for better returns, then bonds are worth looking at.
- Do you need the money soon? If you might need the money before the term ends, bonds can be more flexible.
FAQs
Q1. Are corporate bonds a good idea for a beginner investor?
They can be, as long as you are careful. Start by investing in bonds from companies with a very high credit rating (AAA). This will give you a good and safe start.
Q2. Do all FDs have the same interest rate?
No, different banks and different types of FDs have different interest rates. Small finance banks and corporate FDs often give higher interest rates than bigger banks.
Q3. Is the interest I receive from a bond or an FD taxed?
Yes, the interest earned on bonds and FDs is added to your income and taxed according to your tax slab. Tax-free bonds are an exception, but for the most part, the interest is taxable.
Q4. Can I invest in both?
Yes, people own both. It is a smart way to manage risk. You may put some of your money in safe FDs and invest a small amount in corporate bonds for the possibility of better returns.
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