Many investors face the dilemma of choosing between fixed deposits and investment bonds. When you are two-minded about such investments, you must not take any decision in a hurry. Remember to carefully evaluate the benefits and features of both these investment tools. The success of any of the investment options depends on your financial goals. To help you understand better, here is a summary of both the investment options:
Fixed deposits are an investment option that involves saving a lump sum amount for a fixed tenure at a fixed interest rate. Investment bonds also involve saving a fixed amount for a fixed time period. But the rates of interest in FD are much higher than that of investment bonds. However, investment bonds are more tax-efficient than fixed deposits.
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The rate of interest is a crucial factor while evaluating any investment option. You will be able to fulfil your financial goals based on the returns component of your investment. if you are only looking for better returns or regular income then you must choose an FD that pay interest on monthly, quarterly or annual basis. But if you just want your wealth to grow, you can opt for bonds where the interest earned is reinvested and paid at maturity.
See Also: How To Choose the Best FD?
Benefits of investing in fixed deposits:
See Also: Fixed Deposit Vs Fixed Maturity Plan
Parameters |
Fixed Deposit |
Investment Bonds |
Rate of returns |
FD provides good returns on maturity provided the money is locked in for a fixed period. The rate of interest is fixed and is defined at the begging of the tenure. Hence you get fixed returns.
|
Bonds also provide a payout at predefined periodicities. However, Bonds offer the additional scope of earning Capital Gains, as Bond prices fluctuate either based on changes in market interest rates or due to changes in the creditworthiness of the issuer |
Risk |
Fixed deposits are unsecured investment options. Though are very fewer chances of losing money in FD, investors may end up in losses in the banks liquidates or merges with other banks |
Most of the bonds are secure as they are backed by physical assets that investors can claim if the company fails to repay. |
Liquidity |
Fixed deposits have a fixed lock-in period. Deposits can be withdrawn prematurely by paying a penalty. |
Bonds can be traded on exchanges and is, therefore, more liquid when compared to fixed deposits. |
Investment Type |
The Fixed deposits have various non-cumulative options for interest payout namely the monthly, quarterly, annually as well as the cumulative interest payment option.
|
The investment bonds pay interest only on a cumulative basis where the interest is paid annually. |
Withdrawal cost |
Premature withdrawals on FDs attract a penalty of 1-2% of the interest payout.
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Since bonds are tradable you can exit from these prematurely. |
Tax deductions |
TDS on FD is applicable only if the interest income exceeds beyond Rs. 10,000 per annum. Interest income on FDs is subject to taxation as per the existing tax slabs.
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The listed bonds in DEMAT form are not subjected to TDS on the interest payout. Interest income from bonds is taxable according to the existing tax slabs. However, tax-free bonds issued by the government are fully exempt from taxes. |
If you are looking for short-term investment tools then investment bonds are the best options. But bond trading is not everyone’s cup of tea. So FD investments are perfect investment instruments for you if you are looking for fixed returns or a periodic interest income.
See Also: Benefits of Fixed Deposit in India
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