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New Delhi: When a repo rate cut is initiated, the returns on Fixed Deposits (FD) are affected. When RBI reduces interest rates, banks also reduce the interest earned on FDs. In such a situation, many investors start wondering whether it would be better to withdraw money from FDs and invest in bonds now? But before making a decision, it is important to know both its benefits and risks.
Bonds also have risks. The biggest risk is credit risk i.e. if the bond-issuing company gets into a financial crisis, then your money may get stuck. Government bonds are almost free from such risks because they are guaranteed by the government. But in corporate bonds, your entire income rests on the financial position of the company. Then comes the interest rate risk. If interest rates rise in the future, the price of bonds may fall. This effect is especially visible in long-term bonds.
Liquidity: FDs Forward, Bonds Behind
You can break the FD at any time. There are few penalties, but the money is easily available. This does not happen in bonds. If you want to sell the bond before maturity, many times you cannot get a fair price. This is the reason why liquidity is considered low in bond investments. Apart from this, insurance cover from DICGC in FDs up to 5 lac rupees, whereas bonds do not have any such protection.
If your priority is security, then government bonds are best. The profit of government bonds increases when the interest rate decreases, because their prices increase as soon as their yield decreases. The average yield of government bonds in India ranges from 5.6% to 6.7%. These are considered safe options for those who want to take risks without taking any risk.
Corporate bonds have different ratings. AAA rated bonds are the safest and yield around 7% to 8.5%. BBB rated bonds return from 9% to 12%, but the risk is also high. Experts are of the opinion that investors seeking low risk should only focus on AAA rated bonds.
If retail investors want to buy bonds directly, the minimum amount is slightly higher. It is generally considered to start from Rs 1 to 2 lakh. If you are investing Rs 5 lakhs or more, you can divide it into several companies, which reduces the risk.
Where to invest?
Where to invest now depends entirely on your needs and risk appetite. If you want safe and easy to get money, then an FD is better, because it provides bank guarantees. But if you can withstand some ups and downs and want higher returns than FDs, then government bonds or corporate bonds with an AAA rating can be a good option.
