Fixed Deposits & Bonds
Not all of your money should be in equity. Fixed income is the part of a portfolio whose job is to be boring — to be there, in full, on the day you need it.
Distributed by Naveen Kumar Pandey, AMFI ARN-276664, EUIN E521164No consultation fee
What this actually is
A fixed deposit is a loan to a bank or a company for a set period at a set rate. Bank deposits are covered by DICGC deposit insurance up to a limit per depositor per bank; company deposits are not covered at all, which is exactly why they pay more.
A bond is a loan to a government or a company, usually with interest paid at fixed intervals and the principal returned at maturity. Government securities carry sovereign risk — effectively the lowest credit risk available in rupees. Corporate bonds pay more because the company can default, and the credit rating is your first guide to how much more risk you are taking.
54EC capital gain bonds are a specific tool: issued by bodies such as REC, PFC and IRFC, they let you defer tax on long-term capital gains from the sale of land or a building if you invest within the prescribed window. They have a fixed lock-in and a capped investment amount, and the rules are strict about timing.
Secondary market bonds are existing bonds bought from another holder rather than at issue. They can suit an investor who wants a particular maturity or a regular payout date, but pricing and liquidity need care.
Key facts
- Bank FD safety net
- DICGC insurance covers deposits up to a specified limit per depositor per bank — currently ₹5 lakh including interest
- Company FDs
- Not covered by deposit insurance. Rated by agencies such as CRISIL and ICRA
- Government securities
- Sovereign credit risk — the lowest available in rupees
- 54EC bonds
- Fixed lock-in and a capped annual investment; must be invested within the prescribed window after the sale
- Taxation
- Interest is generally taxed at your slab rate. TDS may apply. Confirm the current treatment before you invest
This suits you if
- Retired people who need predictable income
- Anyone with a goal in the next one to four years
- Investors building the stable half of a balanced portfolio
- Someone who has just sold a property and is facing a capital gains bill
We would say no if
- Building long-term wealth on its own — after tax and inflation, fixed income usually preserves value rather than growing it
- An emergency fund, if the instrument has a lock-in
Some conversations end here, with us telling you this is not the right product for you. That is a perfectly good outcome.
How it works, step by step
Decide how much needs to be safe
Emergency fund, near-term goals, and the ballast in a long-term portfolio. That total is your fixed income allocation.
Match the maturity to the date
A three-year goal wants a three-year instrument. Chasing a longer maturity for a slightly better rate is how people end up selling at a loss.
Look at credit, not just the rate
A higher rate is the market telling you there is more risk. We go through the rating and the issuer before the yield.
Complete the application
Directly with the bank, company or issuer, or through the official bond platform. Payment never comes to us.
Track maturities
We keep a note of your maturity dates and remind you, so money does not sit idle in a lapsed deposit.
What can go wrong
Every product has a downside. Here is this one's, in plain language, before you decide anything.
- "Fixed" refers to the rate, not to safety. A company can default on a fixed deposit or a bond, and the higher the promised rate the more carefully you should read the rating.
- Bank deposit insurance is capped per depositor per bank. Spreading large sums across banks matters.
- Breaking a deposit early usually costs you a penalty and a lower rate for the period held.
- Bond prices move with interest rates. If you sell before maturity you can get back less than you paid.
- Interest is normally taxed at your slab rate, which can make the post-tax return lower than it first appears.
- 54EC has hard deadlines. Miss the window and the exemption is gone — talk to us and to your tax adviser as soon as a sale is agreed, not after.
Questions people ask us about this
Is a company FD as safe as a bank FD?
No. Bank deposits carry DICGC insurance up to a limit; company deposits carry none. The extra interest a company offers is payment for that extra risk, and the credit rating is the first thing to look at.
What are 54EC bonds for?
They let you defer tax on long-term capital gains from selling land or a building, if you invest the gain in specified bonds within the prescribed period after the sale. There is a lock-in and an annual cap, and the timing rules are strict.
Should I put my retirement corpus entirely in FDs?
Usually not. After tax and inflation, a pure FD portfolio often loses purchasing power over a long retirement. The usual answer is a mix, with enough in fixed income to cover several years of expenses.
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