FD vs Bonds: It is necessary to diversify the investment portfolio to obtain good returns within a reasonable range of risk. Today, many people invest in stocks and mutual funds, which are medium to high risk investment options. For reasonable returns and security, investors often turn to fixed deposits (FDs) and bonds.
What is a Fixed Deposit?
Fixed deposit is a financial instrument offered by banks that offers investors a higher interest rate than a regular savings account, until the given maturity date.
Investors deposit a lump sum in their bank for a fixed term at an agreed interest rate. At the end of the term, they receive the amount they had invested plus compound interest.
What are bonds?
A bond is a fixed income instrument that represents a loan made by an investor to a borrower (usually a company or government). A bond can be thought of as an “I owe you” or an acknowledgment of debt (a document that acknowledges the existence of a debt) between the lender and the borrower that includes the details of the loan and its payments.
Bonds are used by corporations, municipalities, states and sovereign governments to fund projects and operations. Bond owners are the debtors, or creditors, of the issuer.
Bonds are rated as representations of corporate or government bond creditworthiness. Ratings are published by credit rating agencies and provide assessments of a bond issuer’s financial strength and ability to repay bond principal and interest in accordance with the contract.
They are rated from AAA to D, with AAA being the highest rating.
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FD vs Bonds
How safe are bonds compared to FDs?
According to Shweta Jain, founder of Investography Pvt Ltd, the safety of bonds depends on the entity that issued the bonds. “If the company issuing the bond is rated AAA (the highest possible rating that can be assigned to an issuer’s bonds by any of the major rating agencies), that’s pretty safe, but if it’s rated AA, it is not. Also, keep in mind, by investing in the bond issued by a company, the investor is taking on the risk that the company will repay. In a FD, up to 5 lakhs are insured which is not the case with bonds,” she said. said.
What is the best investment option?
FDs and bonds have their own advantage and depend on the requirements of the investors.
“It depends on the needs. If the requirement is safety, then FD is definitely better, but if the requirement is return on investment, then one can look at bonds knowing they are taking a risk for that extra return,” Shweta said.
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