Fixed Deposits & Bonds

Debt Investments or Fixed Income Investment is an Investment which is supposed to be a safe and providing a specific percentage of return for a given period of time. When we talk about them in the form of assets it can be classified as Fixed Deposits with Banks/Corporate, Corporate Bonds, Government Bonds, Tax Free Bonds, Non-Convertible Debentures etc.

How it works?

Fixed Deposits with Banks: In India Fixed Deposits are very popular means of savings with Banks. Banks need deposits which is their source of fund and they provide credit to the borrower as a loan in the form of personal loan, home loan, business loan etc. Bank pay you a pre-determined return in the form of Rate of Interest (ROI) for a specified period. If you withdraw the money before the fixed maturity period there may be a penalty. The ROI may vary depending upon the tenure but higher than a regular savings bank account. Fixed Deposit can be done with NBFCs (Non-Banking Finance Companies), HFCs (Housing Finance Companies) and Corporates which generally gives higher ROI compared with banks.

Bonds/Non-Convertible Debenture: Bonds are loans given to the Government or Corporate. These entities require capital to run their business or their working capital. They borrow money from the bondholders and issues bond to them with a commitment to pay back the principal and interest for a specified period of time. The instruments issued by these entities are called Government Securities/Corporate Bonds, NCD, Tax-Free Bonds, Perpetual Bonds etc. which are traded on capital markets. In case of Bonds/NCD there is a concept of Price, Yield and Maturity.

In recent past Bonds/NCD has taken favour among the Retail Investors because they give better return compared to the Bank FDs and are also tradable on exchange. Most of the Financial Institutions like Insurance Companies, Mutual Funds, Employee Provident Funds invests in such bonds. We as Retail Investor indirectly invests by purchasing Insurance Policies, PPF, Debt Funds. So, some or the other way our savings are being exposed to these instruments.

How to do it?

If you are looking at a return which is more stable then you can put your savings in Fixed Deposits/Bonds. From safety prospective Fixed Deposits with Banks and Higher Credit rating Corporate are the best. But if you want a better return then you can look to invest in Corporate Bonds/FD of Corporate of not so good rated entities.

Meant for which kind of Investor:

Fixed Deposit/Bonds as an instrument is meant for investors who are conservative looking for lower return with safety of the principal amount invested. Preferably the investors in their Retirement life cycle require the safety of their Investment. So FD/Bonds are recommended for them. At the end of the day, it is up-to the individual investor to decide for themselves whether they wish to pursue a high return-high risk approach or a relatively lower but largely safe investment approach.

Types of Entities offering Fixed Deposits/Bonds

· Central Government & State Governments

· Banks & Financial Institutions

· Non-Banking Finance Companies (NBFCs)

· Manufacturing Companies

· Housing Finance Companies

· Public Sector Units

The Role of Fixed Deposit/ Bonds in a Portfolio:

Capital Preservation: Unlike Equities, FD/Bonds should repay principal at a specified date, or maturity. This makes bonds appealing to investors who do not want to take risk for losing capital and to those who must meet a liability at a particular time in the future. Bonds are offering interest rate that is often higher than short-term savings rates.

Regular Income Stream: Most of all FD/Bonds provide some amount to the investor with fixed ROI. On a set schedule, whether quarterly, twice a year or annually, the bond issuer sends the bondholder an interest payment, which can be spent or reinvested in other bonds.

Capital appreciation: Bond prices can rise for several reasons, including a drop-in interest rates and an improvement in the credit standing of the issuer. By selling bonds after they have risen in price and before maturity investors can realize price appreciation, also known as Capital Appreciation, on bonds.

Potential Hedge against an Economic Slowdown or Deflation: FD/Bonds helps investor to protect against an economic slowdown. FD/Bonds pay a fixed ROI that does not change. Slower economic growth usually leads to lower inflation, which makes bond income more attractive.

Investment is FD/Bonds has to be looked from below prospective:

· Asset Allocation

· Regular Flow of Income

· Capital Protection

Capital Gain Bonds

54EC Capital Gain Bonds are a type of financial instrument issued by specified institutions in India. These bonds provide a tax-saving option for those who have incurred long-term capital gains from the sale / transfer of long-term capital assets being land, building or both.
The entire capital gain amount invested in these bonds would be exempted from tax u/s 54EC.

The lock-in period for these bonds is 5 years from the date of purchase. They offer annual interest pay-outs. The date of interest payment is fixed and differs from issuer to issuer. The interest income earned from 54EC Capital Gain Bonds is taxable. These bonds can be held in both demat as well as physical certificate.

These bonds are considered a safe investment because they are typically issued by government-approved entities, and the interest rate is fixed.

RBI BONDS Floating Rate Savings Bonds

The Government of India launched the Floating Rate Savings Bonds, 2020 (Taxable) scheme on July 01, 2020 to enable Resident Indians/HUF to invest in a taxable bond, without any monetary ceiling.

The tenure of RBI bonds is seven years from the date of issue. However, there are some exceptions for senior citizens who can redeem their bonds early. The coupon/interest of the bond will be reset half yearly based on National Savings Certificate (NSC) rate (Base rate) + 35bps. Half-yearly interest is payable on 1st January / 1st July. Income from the bonds is taxable.

RBI Bonds is meant for investors who are conservative looking for safety of the principal amount invested.