genuinely trying to understand this. SBI FD is at 7% right now. I found a AA rated NCD on BondScanner at 9.5%. the 250bps difference is real money on a decent corpus. but everyone keeps saying FD is safer. is the risk actually worth it or am I missing something?
FD is insured up to 5 lakhs
bond is not
okay so if I’m putting in more than 5 lakhs the FD insurance doesn’t help much anyway
That is a fair point and one most people miss. DICGC insurance covers up to Rs 5 lakhs per depositor per bank. If your FD corpus is significantly higher, the incremental safety of the FD over a AA rated bond is less meaningful than it appears.
The real question is what you are comparing. A AA rated NCD from a large NBFC is not the same risk as an FD. But it is also not equity. The issuer has been rated by an independent agency, has disclosed financials, and has a legal obligation to pay. The 250bps premium exists because there is real but manageable risk, not because it is speculative.
okay but what if the company goes bust
FD at least has the bank behind it
That is the right concern to have. Default risk on a AA rated issuer is low but not zero. The question is whether 250bps per year adequately compensates you for that risk.
That said, AA defaults in India have been rare. The more realistic risk is a rating downgrade, which affects the market value of the bond if you need to sell before maturity. If you hold to maturity and the issuer pays, you collect exactly what was promised. The risk is real but it is not the same as losing principal overnight.
One thing to factor in before comparing the two. Both FD interest and NCD interest are taxed at your income slab rate. At 30% bracket, 7% FD becomes 4.9% post-tax and 9.5% NCD becomes 6.65% post-tax. The gap narrows but it is still 175bps in favour of the bond. On Rs 10 lakhs that is Rs 17,500 per year extra, every year, for the same tax treatment.
Divishtha that post-tax math is the one I needed. so the gap is real even after tax. going to look more carefully at the issuer before deciding. Disc: not putting everything in one bond regardless.
fd = insured, lower return, zero issuer risk
bond = higher return, issuer risk, not insured
both taxed same
if corpus is small, fd makes more sense. if corpus is large and you pick carefully, bond gap is worth it