Bond & Fixed Deposit
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