Government Bond vs. FD: 7% Government Bond or 7.5% FD—where should you invest?

Government bond yields have crossed the 7% mark. Meanwhile, some banks are offering interest rates exceeding 7% on fixed deposits (FDs). Consequently, for those seeking safe investment avenues, it has become essential to compare government bonds with fixed deposits. However, the two investment options differ in terms of interest rates, risk profiles, and withdrawal conditions.

**10-Year Government Bond Yield Crosses 7%**
The yield on India's benchmark 10-year government bond rose to 7.1067% on September 24. The yield on the 6.94% 2036 government bond saw a single-day increase of 6 basis points. This level marked a high not seen since May 21.

The rise in bond yields is attributed to factors such as global bond yield trends, crude oil prices, and shifting expectations regarding the Reserve Bank's monetary policy. Rising long-term bond yields in the US can also impact the Indian bond market.

**Interest Rates on FDs Range from 6% to 7.5%**
Interest rates on bank fixed deposits vary depending on the bank and the investment tenure. According to a Financial Express report, HDFC Bank offers interest rates between 6.25% and 6.50% for various long-term tenures on deposits below ₹3 crore. Meanwhile, IDFC FIRST Bank offers up to 7.10% interest to general customers and 7.35% to senior citizens on certain tenures.

Some small finance banks may offer even higher FD rates for select tenures. However, investors should consider the bank's financial health, the deposit insurance limit, and the terms associated with the specific tenure.

**Key Difference Between Government Bonds and FDs**
In an FD, money is deposited for a fixed period. If the investor holds the FD until maturity, they receive the proceeds in accordance with the applicable terms. This makes it easier to estimate the amount receivable in the future.

Holding a government bond until maturity ensures the return of the principal amount as per its terms. However, if an investor sells it before maturity, the bond's price may fluctuate based on prevailing market interest rates.

Generally, when interest rates rise, the price of existing bonds falls. Conversely, a drop in interest rates can lead to an increase in the market price of existing bonds. Therefore, a 7% yield does not guarantee a 7% return if the investor sells the bond after two or three years.

Understand taxes and risks before investing
Interest income from both government bonds and Fixed Deposits (FDs) may be subject to tax in accordance with applicable income tax regulations. Thus, making a decision based solely on the interest rate is not advisable; the post-tax return is also a crucial factor.

Experts suggest that investors who might require funds regularly should be aware of the interest rate risk associated with long-term bonds. On the other hand, those with the capacity to stay invested for the long term might consider including government bonds in their fixed-income portfolio.

Where to invest?
Government bonds and FDs cater to different needs. FDs offer simplicity and predictability regarding the maturity amount, whereas government bonds combine sovereign credit quality with the risk of market price fluctuations.

Before making an investment decision, determine when you will need the funds, how long you can remain invested, and the extent of market risk you are willing to accept.

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