Bonds vs Traditional Instruments: Which investment can offer better returns? Find out

There are many schemes run by the government, such as Public Provident Fund, Sukanya Samriddhi Yojana and Senior Citizen Savings Scheme. These deliver returns of 7-8 per cent.

New Delhi:

Fixed deposits, bonds, debt mutual funds, PPF, senior citizen saving scheme – what’s common about these savings schemes? They are all forms of fixed income investments which provide stable, secure returns, unlike equity or cryptocurrency, which are not just volatile but unpredictable too. But the question is, which one is better out of these fixed-income investments? Let’s find out.

According to Suresh Darak, Founder, Bondbazaar, investors need to consider returns, convenience and liquidity while choosing which fixed income instrument works best for them. Here’s the detail about each one of the investment option mentioned above. 

Fixed Deposits: Investors are most familiar with these, where they need to go to their bank and easily open an FD with them. FDs offer fixed returns of 7-8 per cent, and are easiest to operate as they do not require any additional documentation or processing. 

“However, their returns are relatively low, and early closure of the FD incurs a penalty or lower returns for the investor,” Darak said.

Bonds: They are just like FDs, providing investors with regular interest and principal at maturity. Bonds are issued by large corporates, financial institutions, and governments. Investment-grade bonds deliver higher returns of 8-14 per cent. However, investors need to open a demat account to purchase and hold bonds, just like they do with stocks. 

“While each bond has a specified maturity ranging from 90d to 40 years, investors’ money is not locked in for the entire duration. If the investor chooses, he/she can sell the bond anytime on exchanges NSE or and receive funds on T+2 day. Investors can explore the bond market to not only earn higher returns, but also enjoy higher liquidity as well as high safety,” he said.

More sophisticated investors can also leverage the bond market to earn tax benefits through specific instruments such as (i) tax free bonds where the interest income is completely tax free (ii) 54 EC bonds where investors can save capital gains from sale of real estate (iii) deep discount bonds where the capital gains are taxed at lower rate compared to income tax slab rate for those in higher tax brackets. 

The entire bond market is fully regulated by SEBI, and all issuers are rated by SEBI-accredited rating agencies such as CRISIL, CARE, ICRA.

Debt Mutual Funds: Instead of investing directly in bonds, investors can choose to invest in Debt Mutual Funds that collect money and invest it in bonds. However, they invest primarily in very liquid government or corporate bonds, and deliver returns of 7-8 per cent because of that. It is relatively easy to invest in a debt mutual fund since one does not require a separate demat account, but the returns are not significant either. There is no penalty on withdrawal, although an exit fee may be charged in certain circumstances.

Government Saving Schemes: There are many schemes run by the government, such as Public Provident Fund, Sukanya Samriddhi Yojana and Senior Citizen Savings Scheme. These deliver returns of 7-8 per cent and moreover have a high lock-in of 5-15 years. However, some of these schemes are tax-free, so the effective returns are much higher.

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