My FD is renewing next month at 7%. A bond at 9% sounds better but my father says FD is safer. Who is right?

QnA Discussions
1

FD is maturing next month. Bank is offering 7% for a fresh 2-year FD. Saw some AA rated bonds at 9% on BondScanner for similar tenure. My father says FD is safer and not to bother with bonds. Is the 2% difference worth switching or is he right?

2

Your father is not wrong that FDs are simpler and carry DICGC insurance up to Rs 5 lakh. That is a real and meaningful protection. But the framing of safer versus less safe only captures part of the picture. A AA rated secured bond from a well-established NBFC has a historically very low default rate. The 2% yield difference over a 2-year period on Rs 5 lakh is roughly Rs 20,000 extra in interest. That is the concrete price of choosing simplicity over yield.

3

so the 2% extra on bonds is basically what you pay for the peace of mind of DICGC insurance and easy exit?

4

Roughly yes. DICGC insures deposits up to Rs 5 lakh per bank. Above that, an FD has no special protection either. For amounts above Rs 5 lakh, the safety differential between a top-rated bank FD and a AA secured bond from a large NBFC is narrower than most people assume.

5

Two practical differences that matter beyond credit risk. First, early exit. An FD can be broken early with a penalty, typically 0.5 to 1% interest loss. A bond in the secondary market may not have a ready buyer at a fair price. If there is any chance you need the money before maturity, that liquidity gap matters. Second, the bond requires a demat account and some basic due diligence on the issuer. The FD requires neither. If the extra Rs 20,000 is not worth that friction to you, the FD is a legitimate choice.

6

what about the tax. isn’t it the same on both

7

Yes, identical. Both FD interest and bond interest are income from other sources, taxed at your slab rate. TDS applies on both above the threshold. The tax treatment is not a differentiating factor between the two.

8

the honest answer: if you are investing below Rs 5 lakh and might need the money early, FD is fine. if you are investing above Rs 5 lakh, have a demat, and can commit to the tenure, the 2% yield pickup on a AA secured bond is real and worth taking. your father’s instinct is not wrong, it is just calibrated for simplicity rather than return optimisation.