Rising Tide: Savvy Investors Investing with FDs and Corporate Bonds

The investment market is highly dynamic, yet exciting. Here, people venture into various investment avenues with unique investment objectives and financial goals. However, the purpose trickles down to multiplying wealth through quick trading or accumulating returns over a while via stable investment avenues. When it comes to the latter, two of the most common and popularly followed investment routes amongst savvy investors are fixed deposits and corporate bonds. So, let’s review both.

What are Fixed Deposits?

As an investment avenue, fixed deposits have been around in India for long. Many conventional investors rely on fixed deposits more than any other investment alternatives. However, if you are new to fixed deposits, understanding them can help you make an educated investment choice. So, here’s an overview of fixed deposits.

Fixed deposits (FDs) are financial instruments that banks and other financial institutions offer. They involve depositing funds for a fixed tenure and at a predetermined fixed interest rate. With most fixed deposits, the interest rate remains unchanged throughout the tenure. Besides, the principle remains the same. Hence, while earning a periodic (monthly, quarterly, or yearly) interest, investors get their principal back upon the fixed deposit’s maturity. Accordingly, most investors consider fixed deposits as safe and bankable investment options. Some elements of a fixed deposit include the following.

• Deposit: It is the amount the investor deposits in their fixed deposit account. It can range from a few thousand to several lakhs.
• Interest Rate: The fixed deposit’s interest rate is fixed at the time of investment and remains unchanged throughout the deposit’s tenure. Interest rates offered can vary with the bank, type of fixed deposit, investor type, and duration. As mentioned earlier, investors can choose to receive periodic interest payout or at the time of maturity with the principal amount.
• Tenure or Duration: Depositors choose a tenure for which they’d want their amount to remain as a fixed deposit. It can vary from a few days to several years, based on the options the bank or financial institution provides. Typically, the amount remains locked for the said period. However, some financial institutions allow investors to withdraw the fixed deposit partially or fully. In such cases, the investor may have to pay a penalty or incur an interest loss.
• Taxation: Fixed deposit interest rates are subject to taxation per the Income Tax Act, of 1961. Depositors should factor in tax deductions while calculating the returns they’d earn on their fixed deposit.

What are Corporate Bonds?

Bonds are an equally popular investment alternative in India. Corporate bonds are among the various types of bonds in which people invest. These debt securities that companies issue to raise funds for various purposes like acquisition, expansion, equipment purchase, project completion, etc. can issue bonds to investors. Corporate bonds offer regular interest payouts and return of principal upon the bond’s maturity. Like fixed deposits, corporate bonds also have a set of elements, including the following.

• Face Value: It is the amount that the bond’s issuer commits to repay to the bondholder upon the bond’s maturity.
• Coupon Payments: The bond’s issuer pays periodic interest payments called coupon payments to the bondholders.
• Maturity: It is the date on which the issuer should repay the principal amount to the bondholder. Thus, at maturity, the bondholder receives the bond’s face value.
• Bond Prices: Corporate bond prices fluctuate in the secondary market depending on factors like credit ratings, interest rates, and market conditions. A rise in the interest rate can cause a decline in the existing bond’s price and vice versa.
• Credit Ratings: Corporate bonds receive credit ratings from credit rating agencies depending on the issuer's creditworthiness. A higher rating usually refers to a lower yield and vice versa.

Benefits of Investing in Fixed Deposits

Investing in fixed deposits can prove an advantageous decision due to the following.

• Fixed and Guaranteed Returns: Fixed deposits offer a fixed interest rate, thus, helping the depositor earn predictable and fixed returns on their investment.
• Regular Income: Fixed deposits can serve as regular income. Hence, they are more popular among retirees and conventional investors who look for stable and fixed returns and do not necessarily benefit from market surges.
• Flexibility of Investment and Liquidity: Fixed deposits allow investors to choose their tenure depending on their financial goals. Investors can also withdraw the fixed deposit to serve a pecuniary emergency or requirement.
• Tax Benefits: Some fixed deposits like the tax-saving ones offer tax benefits under Section 80C of the Income Tax Act. Thus, investors can save taxes to some extent.
• Safety: Fixed deposits are a safe investment as they provide fixed interest payouts, capital protection, and regulation from the government. Besides, they offer stability to an investment portfolio, protecting the individual’s investment during market fluctuations.

Advantages of Investing in Corporate Bonds

On the other hand, corporate bonds also offer numerous advantages. Some of the most common ones include the following.

• Regular Source of Income: Corporate bonds usually make interest payments regularly, enabling investors to build a steady source of income. 
• Capital Appreciation: Corporate bonds can appreciate over time with a reduction in interest rates or an increase in the issuer’s credit quality.
• Diversification: Investing in corporate bonds can help investors diversify their portfolios, spread risk across various asset classes, and lower portfolio volatility.
• Credit Quality: Corporate bonds are backed by the ratings of credit agencies. These ratings serve as an element of trust, security, and stability while investing.
• Higher Yield: Corporate bonds typically offer higher yields than government bonds. Higher yields translate into more significant returns.
• Tailored Investments: Corporate bonds are offered in many types. Investors can thus customize their investments per their investment goals and risk appetite.
• Liquidity: Investors can trade corporate bonds in the secondary market. However, liquidity can differ based on the bond's characteristics and market conditions.

Why are Fixed Deposits and Corporate Bonds Considered Steady Investment Options?

Precisely, some factors that determine the stability and steadiness of corporate bonds and fixed deposits include the following.

Regular Income

Corporate bonds and fixed deposits pay interest periodically to the investors. It means investors receive a certain amount after a particular period in their bank account. By creating a regular income stream, investors can plan their finances better.

Fixed Interest Payouts

Fixed deposits and corporate bonds pay regular fixed interests to their investors. The interest rate is predetermined at the time of investment. Hence, investors know what they’ll receive after a certain period. It also refers to predictable income.

Safety and Security

While fixed deposits are backed by banks and their trustworthiness, corporate bonds leverage the issuer’s creditworthiness to attract investors. Hence, both are considered safe and secure investment options.

Are Corporate Bonds Better than Fixed Deposits?

The answer is pretty subjective. It depends on an individual’s investment objectives, outcome expectations, and financial requirements. Many corporate bonds offer higher yields than fixed deposits. For instance, a corporate bond may commit to a 13.5 per cent yield. On the other hand, fixed deposits offer 6-8 per cent returns. However, if the inflation rate dwarfs the interest rate on the fixed deposit, the value of the money invested will eventually reduce. Corporate bonds offer higher returns. But they aren’t devoid of potential risks like the company defaulting on principal repayments.

Thus, the choice of the option depends on the investor’s goals and investment psychology. Hence, one cannot generalize and claim one option to have an upper hand over the other. Experts recommend maintaining a balance of investments with a diversified portfolio that includes versatile options to spread the risk, benefit from market ups with high-yield alternatives, and offset the risk of market downs with investment avenues offering stable income.

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Disclaimer: The contents of this article should not be construed as tax or financial advice. Readers should seek advice from their tax or financial advisor before making any investment decision.