FD vs Bonds: With Interest Rates Falling, Should Investors Shift Money From Fixed Deposits to Bonds?

The recent reduction in the repo rate has once again brought fixed deposit investors into a dilemma. As the Reserve Bank cut the benchmark interest rate by 25 basis points last week, banks have already begun lowering their fixed deposit (FD) rates. This has prompted many savers to ask a critical question: Is it wiser to withdraw money from FDs and invest in bonds instead?

Financial experts believe that during a phase of declining interest rates, several fixed-income options—such as government bonds, State Development Loans (SDLs) and corporate bonds—become more attractive. While each category comes with its own level of safety, return and risk, the key is to understand their differences before making a shift.

Falling FD Rates: Why Investors Are Exploring Alternatives

As banks recalibrate FD rates after the repo rate cut, the returns on traditional deposits naturally decline. For conservative investors, this means their low-risk savings instrument becomes even less rewarding. Bonds, however, tend to offer an opportunity during such times—especially because bond prices typically rise when interest rates fall.

Investors who prioritise stability often turn to government securities, which are backed by sovereign guarantee. The yield on such instruments usually ranges between 5.6% and 6.7%, and falling interest rates actually strengthen their value.

Understanding the Risks: Bonds Are Not Risk-Free

While bonds may appear attractive, investors must acknowledge that they carry their own risks:

1. Credit Risk

Government bonds are the safest because repayment is guaranteed.
Corporate bonds, however, depend entirely on the financial health of the issuing company. Lower-rated companies offer higher returns, but the risk of default also increases.

2. Interest Rate Risk

When interest rates rise, bond prices fall.
This impact is more pronounced in long-term bonds, making them more volatile and less predictable for conservative investors.

3. Liquidity Risk

Experts highlight that liquidity is often overlooked.
Unlike an FD—which can be prematurely broken with a penalty—bonds cannot always be sold at a fair price before maturity. Many investors struggle to exit their holdings without incurring losses.

FD vs Bonds: Comparing Yields

Corporate bonds rated AAA, considered the highest grade, usually offer yields between 7% and 8.5%.
In contrast, bonds rated BBB may offer 9% to 12%, but they carry significantly higher default risk.

For risk-averse investors, experts recommend sticking to AAA-rated corporate bonds or government securities.

Investment Requirements: Bonds Need Higher Minimum Capital

Retail investors considering direct bond purchases must also keep in mind the minimum investment requirement.
Typically, one needs ₹1–2 lakh to start, and about ₹5 lakh to build a diversified bond portfolio across multiple issuers. Such diversification helps balance risk but demands substantial capital compared to an FD.

Debt Mutual Funds: A Practical Alternative

Instead of buying bonds directly, investors can also consider debt mutual funds, which pool money to invest across various debt instruments. SIPs allow investments starting as low as ₹500 to ₹5,000, making them far more accessible.

Experts note that in a falling interest rate scenario, long-duration bond funds tend to benefit the most. However, these funds also show higher volatility, meaning they are better suited for investors willing to tolerate market fluctuations.

Balanced Strategy: What Should Investors Do?

A balanced approach—mixing long-duration and short-duration bonds—can help manage risk effectively.
Short-term bonds offer stability, while long-term bonds capture gains during falling rate cycles.

However, experts stress one crucial point: bonds are not risk-free, and investors should evaluate credit quality, duration and liquidity before shifting money away from FDs.

Bottom Line

As banks reduce FD rates, bonds certainly emerge as an attractive alternative—especially government securities and highly rated corporate bonds. But any move should be based on a clear understanding of the risks involved, investment horizon and liquidity needs.

For those unwilling to take on credit or market risk, sticking with FDs may still be the safer option. For others aiming for slightly higher returns with manageable risk, a carefully planned bond allocation can deliver better outcomes in a declining rate environment.