FD or Bonds: Where should you invest your money after the repo rate cut? Here's the answer

One of the first things affected when a repo rate cut is announced is fixed deposit (FD) returns. When the RBI reduces interest rates, banks also immediately reduce the interest rates on FDs. 

This leaves many investors wondering whether it would be better to withdraw money from FDs and invest in bonds. However, before making a decision, it's important to understand both the benefits and risks.

How safe are bonds compared to FDs?

Bonds also carry risks. The biggest risk is credit risk, meaning your money could be stuck if the issuing company faces financial difficulties. Government bonds are virtually free of such risks because they are guaranteed by the government. 

However, with corporate bonds, your entire return depends on the company's financial health. Next comes interest rate risk. If interest rates rise in the future, the bond's price could fall. This effect is particularly pronounced in long-term bonds.

Liquidity: FDs ahead, bonds behind

You can break an FD at any time. There is a small penalty, but the money is easily recovered. This is not the case with bonds. If you try to sell a bond before maturity, you may often not receive a fair price. 

This is why bond investments are considered less liquid. Furthermore, FDs offer insurance coverage of up to ₹5 lakh from the DICGC, while bonds offer no such protection.

Safest Option: Government Bonds

If safety is your priority, government bonds are the best option. The benefits of government bonds increase during falling interest rates, as their prices rise as yields fall. 

In India, the average yield on government bonds ranges from 5.6% to 6.7%. These are considered a safe option for those seeking a low risk appetite.

Corporate Bonds: Both high and low returns possible

Corporate bonds have different ratings. Bonds rated AAA are the safest and yield around 7% to 8.5%. Bonds rated BBB offer returns of 9% to 12%, but carry higher risk. Experts recommend that investors seeking lower risk should focus only on AAA-rated bonds.

What is the cost of buying bonds directly?

Retail investors who wish to purchase bonds directly require a slightly higher minimum amount. Generally, ₹100,000 to ₹200,000 is considered the starting point. If you are investing ₹500,000 or more, you can spread it across multiple companies, reducing risk.

Where to invest?

Now, where to invest depends entirely on your needs and risk tolerance. If you need safe and easy access to money, fixed deposits are a good option because they offer a bank guarantee. 

However, if you can tolerate some volatility and want higher returns than fixed deposits, government bonds or AAA-rated corporate bonds may be good options.

Investment