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What is a Bank Fixed Deposit?

A fixed deposit or term deposits is an saving option offered by banks wherein a depositor can invest their money for a fixed tenure & rate. The rate of interests depends on the duration of the deposits & the banks.

Features

  • Depositor can earn interest on surplus funds available in the account
  • Encourages saving habit
  • Only one fixed deposit account can be opened at a time. The depositor can open multiple accounts for other such deposits
  • The deposit can be renewed or withdrawn up on maturity
  • As per traditional scheme, the interest earned on FDs gets credited to the depositor’s account either on monthly or quarterly basis, as opted by the account holder
  • Premature withdrawals are not permitted but in case of emergency, banks allow closure of FD accounts. The deduction charges will be levied (percentage of charges may vary from bank to bank)

Non-convertible debentures

Non-Convertible Debentures or NCD cannot be converted into equity shares & hence offer investors higher interest rates. NCDS can further be classified as Secured & Un-Secured.

Secured NCDs are backed by the organization or the issuer company’s assets to fulfill debt obligation. Moreover, NCDs may also feature Put Or Call Options. In simple terms, if the NCDs are issued under “Call Options” (Callable Bonds) then they can be redeemed by the issuer before the maturity. The issuer can can call back bonds if they are issued in a high rate environment & the rates fall subsequently. Whereas in a bond issued under “Put Option” , the investor can sell the bond to the issuer at a specified price before its maturity, if the interest rates go up after the issuance of the bonds.

Features

  • NCDs offer high returns & low risk options. The interest rate & rate of return are subject to market conditions
  • As per section 193 of Income Tax Act, there will be no tax levied on securities issued by companies if they are in a demat form & listed on a stock exchange. However, they are taxable if held in physical form
  • NCDs are rated by agencies like FITCH, CRISIL & ICRA
  • They are offered in four options: monthly, quarterly, annual & cumulative interest

Bonds

Bonds are basically a way for companies & governments for issuing capital for expansion, infrastructural projects, etc. By issuing bonds to the public, the organizations & Government can raise money for their projects. In simple terms bonds are like a loan for which you are the lender. The organization who sells the bonds is known as issuer & the holder is called as an investor. The bonds usually have a defined term or maturity, upon which the bonds can be redeemed.

Features

Diversification :  Investment in fixed income securities counterbalances high-risk investments in a portfolio and serves to even out returns in times of volatility.

Fixed returns :  They offer a potentially attractive and regular income avenue as the rate of interest is fixed (in most cases but not all) till maturity.

YTM (Yield to Maturity) :  By investing in bonds and holding them till redemption, you can earn maximum returns in the form of regular interest plus the face value amount on maturity.

Protect from volatility :  While fixed income securities generally do not offer the high returns potential of other investments, you are spared from the volatility common in other markets as its price fluctuation is relatively lesser than equity stocks.

Liquidity : Fixed income securities provide the flexibility and liquidity required to construct a portfolio customized to your specific investment objective. If required, low-risk fixed income instruments like government bonds can be sold at short notice.

Lower Risk :  Fixed income securities represent a loan from investors. As these investors are creditors to the company, in the eventuality of the company being winded down, they have priority over shareholders.

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