Fixed deposits are one of the most popular investment instruments for people of different age groups. The assurance of guaranteed returns and the option of fixed regular income are the main reasons behind its superlative popularity. The fact that FDs don’t get exposed to market fluctuations makes them a favourite instrument for risk-averse investors.
However, with the Reserve Bank of India reducing lending rates, banks have been lowering the interest rates on fixed deposits. The bank fixed deposit interest rates, which have fallen by 50-100 basis points, are now offering 5-6.5% interest rates on FDs. The rates are slightly lower for public sector banks. This has made the investors worried, who are now looking for an alternative.
What Can Be An Alternative To Fixed Deposits?
Government bonds can be a viable option (or an addition) as they offer slightly higher returns than FDs. They come with longer lock-in periods and offer investors the option to diversify their portfolio.
So, How Do Government Bonds Work?
Bonds are issued by financial institutions or the government for the money invested and investors, in turn, earn regular or fixed interest payments for a certain period. You can compare it to a loan where you, as an investor, becomes the lender and invest your money to the institution which issues bonds and the coupons earned is the interest.
Crucial Points To Know About Govt Bonds
- Government bonds come with a mandatory lock-in period of 7 years.
- They offer 7.75% interest returns
- You can invest in these bonds as low as Rs. 1,000 and in multiple of Rs. 1,000 thereafter
- There is no limit on the maximum amount you want to invest
- For the interest pay out, you can either opt for cumulative or non-cumulative option. Non-cumulative will pay you interest every 6 months, whereas the interest earned will be reinvested and paid to you at the end of the tenure if you go for the cumulative option
Government bonds could be another fixed-income choice for an investor as these are backed by the government, hence are more secure in nature. On the taxation front, banks deduct TDS on FDs, which is not the same for government bonds. Also, government bonds provide a longer investment tenure to the investors than FDs and are likely to provide a higher return than bank FDs. However, on the taxation front, interest earned on bonds is taxable in the same way as fixed deposit interest.
So, you’ll be well-advised to consider even government bonds as another long-term fixed income instrument (like FDs and PPF) while trying to build a diversified investment portfolio.
The author is CEO, BankBazaar.com