Your investment decisions include considerations. Do you have to strive for a higher return with a high downward risk? Or do you have to settle for a low risk and a lower efficiency? In this article we discuss such a decision that you are confronted with: whether you should invest in bank fixed deposits or bonds for your bond allocation in your core portfolio.
Disadvantage
Bonds, whether they only invest in government bonds or government and corporate bonds, expose your investments to market risks.
This is because investments and repayment prices are at the net asset value (NAV) per unit, which is based on the market value of the portfolio.
The market value of the bond fluctuates based on interest in interest. Bond prices are reversed reversed to interest rates. That is, bond prices rise when interest rates fall and the bond prices fall when interest rates rise.
Interest rates have a floor – they usually do not go below the inflation level in a country. However, there is no limit for how much interest can rise.
Of course, the RBI will take steps to control inflation and interest rates through spiral formation. That said, the benefit of the interest rate is greater than the disadvantage. Because the interest is reversed inversely related to bond prices, this translates into: the disadvantage of bonds is greater than the benefit.
So, for allocation to bonds such as an activa class in the core portfolio, should you prefer bond funds or bank deposits? The answer depends on the differential returns and the risk between the two investment products.
Bond funds can offer around 150 basic points more returns, based on an expected return before taxes of 8.5% on bond funds and 7 percent on bank deposits. But what if the bond market decreases and bond funds make a profit? Also what if the fund in which you invest, the benchmark index underlines and generates a lower return?
Conclusion
Winning on your investments in bond funds are taxed at your marginal tax rate, regardless of the holding period, as well as your interest income on bank deposits. The choice between the two products therefore only comes down to your preferences for risk return.
If you prefer stable income products for bond assignment, you must take bank deposits into account. Bank deposits also offer diversification in the source of returns – capital valuation of stock funds and interest income from deposits. But if you don’t mind the disadvantage, bond funds must be your choice.
(The author offers training programs for individuals to manage their personal investments)
Published on June 16, 2025
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