Hyderabad: Even small investors can put their money in government bonds through RBI retail direct platform. Invariably, giving rise to doubts like whether saving money via bonds is a safety measure or there are any inherent risks involved. Are there any alternatives that are surely logical doubts? To dispel such queries, read out the tips given below.
Investing in government bonds
For investors, who prefer the utmost safe investments, government bonds are one of the best options. With a government standing guarantee for your money, the investment and interest earned over it are completely assured. However, interest earnings will be much lower in comparison to bank interest with exceptions sometimes.
Why buy government bonds
Choosing long-term bonds is the key as they are available from a short period to 40 years. In such a long term, bank interests tend to fluctuate a lot. While investing in bonds, good returns are assured in the long run. We should avoid altering investing plans. For instance, investing in gilt funds, there is a bit of risk, as a lot depends on the vagaries of the share market. In contrast, putting money in government bonds is devoid of any risk plus assured returns.
Sometimes, interest on fixed deposits is much lesser in comparison to bond investments since banks have cut down on their interest rates on FDs. For instance, as of December 15, 2021, the Karnataka government bond fetches 6.83% for a 10-year-term bond, which is far higher than the interest offered by some banks.
Government bonds investment
Looking into other investment plans other than government bonds, there are some alternatives. The RBI floating rate bonds yield 0.35 per cent higher than post office national savings. But, it keeps changing every six months. Besides, it cannot be pledged for a loan, while its term is limited to just seven years.
To avoid the impact of fluctuating interest rates, saving money in FDs is a safe bet. Gilt funds one more option to be considered. Senior citizens can choose Pradhan Mantri Vaya Vandana Yojana or Senior Citizen Saving Scheme.
The flip side of savings
Just as interest on fixed deposits is taxable, income on bonds is also taxable based on applicable slabs. While tax burden is less on investments in gilt funds. Another drawback is that there are some difficulties in withdrawing money invested in bonds. However, bonds can be pledged for a loan, but the facility is yet to be introduced.
When bank interest rates go higher, interest rates on FDs go downhill. Whereas, bond markets operate in a slightly different manner. In such situations, the value of the bonds depletes a bit, which is not good for investors.
Also read: Sebi proposes capping ISINs for corporate bonds to enhance liquidity
