Bond is a bit riskier; but consider these pluses over FD

  
Bonds or bank fixed deposits (FDs)? This question frequently pops up in the minds of investors, particularly the elderly and retired ones, who like to play it safe. The conventional wisdom is that FDs are more secure, while bonds have an element of risk. Let's see what experts say.   

Bonds can be a better bet for those income taxpayers who are ready to take some risk than the risk-free bank FDs. According to tax and investment experts, bank FD yield is around 6 percent whereas the bond yield is around 9 percent, 50 percent higher than bank FD interest. They say both have a lock-in period, but income from the bond yield is exempted from the income tax.

Why bond is better than FD?

Batting for bonds, Prateek Toshniwal, Co-founder at MI CAPITAL Services, said, "While bonds and fixed deposits are both lucrative investment options in India, in my opinion, a few benefits of the former outweigh the latter. For instance, bonds offer much higher interest returns than fixed deposits. Bonds with a lock-in period can offer up to 9% returns, much higher than interest earnings on fixed deposits."

Highlighting the income tax benefits for bond investors, Mr. Toshniwal added: “Another factor that makes investing in bonds is their tax implications. Bond earnings are not subject to taxation or TDS. However, according to the Income Tax Act of 1961, the interest earned on fixed deposits is treated as 'income from other sources' and taxed accordingly. Besides these, investors can sell their bonds to encash capital appreciation opportunities, an option not available to fixed deposit account holders.”

Vaibhav Shah, Fund Manager at Torus Oro PMS highlighted benefits other than income tax that a bond investor enjoys: “Bonds provide the necessary diversification as a part of overall debt allocation. While FD rates vary in a defined range, Bonds provide a much larger avenue to take advantage of interest rates across tenure and ratings. Bonds also provide a liquidity advantage where the same can be liquidated in the OTC market compared to FD, which attracts breakage charges. Long-term bonds companies raise for capex attract good yields and thus increase the overall return. Bonds are also structured to replicate some indices, opening different investment avenues.”

Top 5 benefits

On why bonds are better than bank FDs, Kamal Kalaria, marketing consultant at Sunrise Gilt & Securities, listed the following five benefits:

1. Higher returns: One of the most compelling reasons to consider bonds over bank FDs is the potential for higher returns. Fixed Deposits offer fixed interest rates, which tend to be lower due to their low-risk nature. In contrast, corporate bonds often provide higher interest rates, rewarding investors with better returns for the additional risk taken.

2. Tax efficiency: Bonds can be more tax-efficient than FDs. The interest earned on FDs is fully taxable according to the investor's income tax slab. However, certain bonds, such as municipal bonds, offer tax-free interest income. Moreover, long-term bond capital gains can benefit from indexation, reducing the overall tax burden.

3. Liquidity and tradability: Bonds offer better Liquidity than FDs. While FDs typically have a lock-in period during which premature withdrawal can lead to penalties, bonds can be traded on secondary markets, allowing investors to liquidate their holdings more efficiently and at potentially better prices.

4.  Regular income: Bonds are a reliable source of regular income through periodic interest payments, known as coupon payments. This feature makes them an attractive option for retirees and those seeking steady cash flows. Unlike FDs, where interest is typically paid at maturity, bonds can provide a consistent income stream throughout their tenure.

5. Market dynamics and growth opportunities: The bond market offers a variety of instruments catering to different risk appetites and investment horizons. Investors can choose bonds that align with their financial goals and market outlook, from government securities to corporate bonds and high-yield options. Bonds also benefit from favourable market conditions, such as declining interest rates, which can lead to capital gains.

Disclaimer: The views and recommendations above are those of individual analysts or broking companies, not of english.dhanamonline.com. We advise investors to check with certified experts before making any investment decisions.

                                                    By arrangement with livemint.com