Where to invest?
On hearing the announcement of repo rate cut, the first thing that gets affected is the return of fixed deposit (FD). When RBI reduces interest rates, banks also immediately reduce the interest available on FD. In such a situation, many investors start wondering whether it would be better to withdraw money from FD and invest in bonds? But before taking a decision it is important to know both their benefits and risks.
How safe are bonds compared to FD?
There is risk in bonds also. The biggest risk is credit risk, that is, if the company issuing the bond gets into financial trouble, 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 depends on the financial condition of the company. After this comes 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: FD ahead, bonds behind
You can break the FD at any time. There is some penalty, but the money is easily recovered. This does not happen in bonds, if you want to sell the bond before maturity, then many times you are not able to get a fair price. This is the reason why liquidity in bond investment is considered low. Apart from this, insurance cover up to Rs 5 lakh is available from DICGC in FD, whereas there is no such protection in bonds.
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Safest Option: Government Bonds
If your priority is safety, then government bonds are the best. The benefits of government bonds increase further when interest rates fall, because their prices increase as their yield decreases. The average yield of government bonds in India ranges between 5.6% to 6.7%. These are considered safe options for those who want to take no risk.
Corporate Bonds: Both high and low returns possible
Corporate bonds have different ratings. AAA rated bonds are the safest and yield around 7% to 8.5%. BBB rated bonds return 9% to 12%, but the risk is also higher. Experts are of the opinion that investors seeking low risk should focus only on bonds with AAA rating.
What is the cost of buying a bond outright?
If retail investors want to buy the bonds directly, the minimum amount is slightly higher. Generally, starting from Rs 1 to 2 lakh is considered. If you are investing Rs 5 lakh or more then you can divide it among many companies, which reduces the risk.
Where to invest?
Now where to invest, it completely depends on your need and risk appetite. If you want safe and easily accessible money then FD is better because it comes with bank guarantee. But if you can tolerate some volatility and want higher returns from FDs, then government bonds or AAA rated corporate bonds can be good options.