Fixed Deposit vs. Bonds: Which Offers Better Returns?

by Ravi Fernandes
Posted: Apr 05, 2025

When it comes to fixed-income investments, two of the most popular options for Indian investors are Fixed Deposits (FDs) and Bonds. Both offer stable returns, but they differ in terms of risk, liquidity and potential earnings. While Fixed Deposits are a safer choice with guaranteed returns, bonds investment can offer higher yields with some level of risk.

In this article, we will compare FDs and bonds to help you decide which investment suits your financial goals.

What is a Fixed Deposit?

A Fixed Deposit (FD) is a secured investment instrument offered by banks and NBFCs where you deposit a lump sum for a fixed tenure at a predetermined interest rate. At maturity, you receive your principal along with accrued interest.

Example: If you invest ₹1 lakh in an FD for 5 years at 7% interest, you will earn ₹40,255 in interest, making your total amount ₹1,40,255 at maturity.

Risk Level: Low

Return Type: Fixed

Liquidity: Can be withdrawn early with a penalty

Best For: Conservative investors who prefer assured returns

What are Bonds?

A bond is a debt instrument issued by governments, corporations or financial institutions to raise funds. When you invest in bonds, you lend money to the issuer in exchange for regular interest payments (coupon) and repayment of the principal at maturity.

Example: A corporate bond offering 9% annual interest will provide you with ₹9,000 per year on a ₹1 lakh investment, plus the principal back at maturity.

Risk Level: Varies (Government bonds are low-risk, corporate bonds carry credit risk)

Return Type: Fixed but market-linked

Liquidity: Can be sold in the secondary market

Best For: Investors looking for higher yields than FDs with controlled risk

Fixed Deposit vs. Bonds: Key Comparisons

Feature

Fixed Deposit (FD)

Bonds Investment

Returns

Fixed interest, typically 6-8%

Varies (Government bonds: 6-7%, Corporate bonds: 7-14%)

Risk Level

Low (DICGC-insured up to ₹5 lakh)

Low to moderate (depends on issuer rating)

Liquidity

Can withdraw early with penalty

Can sell in the secondary market

Interest Payout

Monthly, Quarterly, Annually or at Maturity

Periodic interest payouts until maturity

Tax Benefits

Tax-saving FDs under 80C

Tax-Free Bonds offer tax exemption

Market Impact

Not affected by market changes

Bond prices fluctuate with interest rates

Best For

Risk-averse investors

Investors seeking better returns than FDs

Key Takeaway: Fixed Deposits provide stability, while bonds offer higher returns with varying risks.

Which Offers Better Returns?

Fixed Returns vs. Market-Based Yields

FDs offer fixed returns, making them ideal for investors seeking stability.

Bonds investment provides higher potential returns, especially in corporate bonds with 8-12% yields.

If you want higher returns and can tolerate moderate risk, bonds are better than FDs.

Tax Efficiency

FD interest is fully taxable as per your income tax slab unless it’s a tax saver FD.

Tax-Free Bonds (like PFC, REC) offer tax-free interest, making them more efficient for high-income earners.

For tax savings, Tax-Free Bonds are a better choice than FDs.

Liquidity & Flexibility

FDs have a lock-in period and premature withdrawal incurs penalties.

Listed Bonds can be sold in the secondary market, offering flexibility.

If you need liquidity, bonds provide better exit options than FDs.

Safety & Risk

FDs are risk-free, as they are insured up to ₹5 lakh per depositor.

Government Bonds are also low-risk, but corporate bonds carry credit risk.

For 100% capital safety, FDs are better. But for slightly higher returns with low risk, Government Bonds are a good choice.

Which One Should You Choose?

Choose Fixed Deposits if:

You prefer guaranteed returns and low risk.

You do not need liquidity before maturity.

You want to avoid market fluctuations.

Choose Bonds Investment if:

You seek higher returns than FDs.

You need flexibility to sell before maturity.

You are comfortable with moderate risk in corporate bonds.

Best Strategy: A mix of FDs and bonds creates a well-balanced portfolio, ensuring both stability and high returns.

Final Thoughts

Both Fixed Deposits and Bonds play an essential role in a fixed-income portfolio. FDs provide security and guaranteed earnings, while bonds investment offers better returns with varying risk levels. The choice depends on your financial goals, risk appetite and liquidity needs.

For a balanced investment strategy, consider allocating funds across both FDs and bonds, ensuring a combination of stability and growth.