Bonds vs Fixed Deposits
Fixed deposits and bonds are types of investment, which can give good returns with interest for a specific period of time. Banks and other financial institutions offer these deposit schemes to investors, so that they can double the money in your bank. While both fixed deposits and banks have their benefits and weaknesses, it is up to us to decide which one to choose.
- Upon investing a lump-sum of amount in the bank for a specific time period, you can enjoy a good interest rate and thus earn a great deal of money upon maturity.
- Fixed deposits are not easily accessible by the investor hence they are always safe in the bank with no or less risk involved.
- Fixed deposits cannot be traded on exchange. Withdrawing the money before maturity will incur penalty charges on the investor along with a reduced or lower interest rate. The penalty charges and reduced interest rate will be decided by the bank in cases of premature withdrawal.
- Fixed Deposits come with Tax Deducted at Source (TDS), whenever banks pay you an interest rate of more than Rs. 5,000 or 10,000 a year, banks can impose a tax on you, thus reducing your returns.
- The interest for the fixed deposit is paid out either monthly, quarterly, annually or upon completion hence giving you a regular income.
- Fixed deposits will incur a tax, based on the tax slab of the individual as well as the amount invested which can lower your rate of interest and end up in a lesser interest rate called tax-free equivalent rate of interest.
- If RBI decides to cut interest rates due to high inflation, then the interest rates will also come down, resulting in reduced return for fixed deposits because of lower interest rates.
- Bonds are a financial security invested in financial institutions, companies or governments offering regular or fixed payment of interest on the amount borrowed to them for a specific period of time.
- Bonds are secured debt instruments backed by assets, the investors can claim the money if the financial institutions fail to repay back the amount.
- Bonds are tradable on exchange to any interested buyer and hence pre-mature withdrawal is also a possibility.
- The rate of interest is paid to the bond holder at regular intervals while the principal amount is paid only upon maturity.
- Bonds are tax free and offer higher after tax returns which are more effective than FD.
- At times of inflation and lower interest rates, the bond prices naturally go up and hence there is scope for capital appreciation and depreciation.
- Bonds are tax free and TDS is also not imposed on them during interest pay-out.
- Interest is paid out either annually or upon maturity.
Since interest from tax-free bonds are free from tax, investors can earn better than Fixed Deposit. As far as Fixed Deposits are concerned, the interest earned are taxed as per the standard tax rates. Fixed deposits win over tax-free bonds when liquidity comes in place.
Weighing the pros and cons, you can come to a conclusion as to choose tax free, tradable bonds or risk free secure FD.
Recommended Read :
- What is a Bond Types of Bonds?
- How to Invest in Bond?
- Basics for Trading in Bonds
- Secrets of Making Money From Bond Market
- How to Select The Best Bonds for Investing?
- Difference Between Bond and Debenture
- Facts About Bonds
- How to Make Money By Trading Bonds?
- What is a Savings Bond?
- What is a Callable Bond?
- Difference Between Callable and Puttable Bonds
- Coupon Bond Market
- What are Infrastructure Bonds?
- What are Floating Coupon Bonds?
- What are Corporate Bonds?
- What is Dirty Price?
- What is Clean Price Clean Price Vs Dirty Price?