The Bank F.D. is seen as a safe option in field of fixed-income. But people who can take a little higher risk can invest in corporate debt. In the past 5 years debt has yielded a higher return than F.D. and Equity portfolios. They give high rate for taking on a little higher risk. We will compare the F.D. and Debt on various grounds and see which one is better overall.
Rate of Return
Bank F.D. gives a fixed return between 7%-8.6% p.a. depending on bank and duration.
Debt gives yields of 9%-11% with mixture of GOI bonds, Corporate debt and deposits.
Taxation
Bank F.D. is taxed on basis of regular income tax slab. People in highest tax slab will get low return from F.D.
Debt is taxed at regular income basis if sold in first year. After that it is taxed at 10% or 20% with indexation. You will also get benefits of double indexation if held for more than 2 years. Tax obligation is nil.
Liquidity
Bank F.D. are fairly liquid and take a few days to be liquefied and they carry a premature withdrawal charge of 0.5-2%
Debt is extremely liquid and can be sold in secondary market at will. It does not cost anything other than brokerage to sell. Which can range from 0.1-0.5%
Capital Appreciation
Bank F.D. do not appreciate in value and only yield interest income. In a falling interest rate environment.
Debt starts to increase in capital value. This give capital appreciation and interest income.
Risk of Investment
Bank F.D. is insured by government up to Rs.1Lakh. After that it carry theoretical risk. But banking sector is tightly regulated so risk of capital loss is low.
As debt is a more risky and needs to be diversified to protect against capital loss. They are also exposed to interest risk.
In my
conclusion is that for those who have higher capital to be invested in fixed-income for medium to long-term. They can thoroughly diversify their debt holdings and take benefit from higher interest rates and capital appreciation in investing in debt portfolio.
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