Bonds, better than FD right now ? 

A Bond can be said as a partial loan to a company or government that pays back a fixed rate of return. Usually, the investor receives periodic interest payments over the duration of Bond’s term. Bonds can also be sometimes referred to as NCDs.

Are Bonds offering better returns to Fixed Deposits? Come let’s find out.

Fixed deposits (FDs) are widely considered by many as the most popular alternative to save money and get decent returns. Our grandparents earned good returns from it, our parents generated their share of decent returns, but today as you read, is it really providing any kind of considerable returns? Banks are constantly slashing the FD rates, making the traditional way of saving money a little less lucrative, isn’t it?

While fixed deposit rates are low, yields on listed bonds from quality companies are at higher levels, providing an opportunity for savvy investors to diversify their investments and generate a decent return.

Generally, the bank fixed deposits (FD) can fetch anything between 5% to 6.75%, whereas the bonds could return 7% to 9% if held to maturity. With an FD, you are lending money to your bank. With Bonds or NCDs, you lend money to the government or a company.

Let’s take a look over some FD interest rates that few bank FDs have to a offer.

From the above data, it is evident that not so long ago, the FD interest rates were decent enough to rely upon, but not in recent times. My take is that we can take benefit of bonds space to generate slightly higher returns with a fraction of additional risk. Oh yeah! It’s about time!. We can shift a part of our long term FDs to Bonds. If you are pure equity or stock market investor then it is also a good time to introduce bonds to your portfolio to balance out the risks. Bonds are a key ingredient in a balanced portfolio. Most investment portfolios should include some bonds, which help balance out risk over time. If stock markets plummet, bonds can help cushion the blow.

Quick facts about bonds

• Average returns: Long-term government bonds historically earn around 7% in average annual returns, versus the 10% historical average annual return of stocks.
• Risks: A bond’s risk is based mainly on the issuer’s creditworthiness.
• Advantages: Slightly higher returns than FD. The relative safety of bonds helps balance the risks associated with stock-based investments.

How do Bonds work ? Let’s take a small example !

Bonds work by paying back a regular amount, also known as a “coupon rate”, and are thus referred to as a type of fixed income security. For example, a Rs 10,000 bond with a 10-year maturity date and a coupon rate of 7% would pay Rs 700 a year for a decade, after which the original Rs 10,000 face value of the bond is paid back to the investor.

Creditworthiness Factor

Often bonds are associated with a “Rating” for their issuer, the ratings are letter-based credit scoring schemes used to judge the creditworthiness of a bond. The higher the bond’s rating the more trustworthy is the issuer, the lower is the coupon rate and vice versa.

Below are few quality NCDs based on the quality of the issuer

1. Tata Capital Housing Finance
   • CMP: Rs. 1,080
   • Coupon Rate: 8.40%
   • Tenure: 8 yrs
2. Tata Capital Financial Services
   • CMP: Rs. 1,116
   • Coupon Rate: 8.65%
   • Tenure: 8 yrs
3. Mahindra & Mahindra Financial Services
   • CMP: Rs. 1,068
   • Coupon Rate: 9%
   • Tenure: 6 yrs
4. L&T Financial Services
   • CMP: Rs. 1,083
   • Coupon Rate: 8.65%
   • Tenure: 7 yrs

By and large,

I think one should be well aware of the risks involved with bond investing but should not ignore the fact that bonds provide better returns if chosen wisely and with an informed decision. Little risk should not hurt while you plan long term goals. Peace out!