In 2022, post-pandemic everyone is looking for a secure investment plan that can give the maximum return. Often people ask our investment consultants where to invest fixed deposits or government bonds. Let us help you to understand which is the best to invest in and why.
Importance of Fixed Deposit Investment in 2022.
Fixed Deposit is the most common investment instrument in our country and for most people, it’s a synonym for investment and the primary place for saving money. A large fraction of people save their money on fixed deposits because it is one of the safest and risk-free modes of investment compared to other volatile investments instrument. One can invest their money in fixed deposits through their respective bank where they have a savings account.
Fixed Deposits are done for a period of time on which the investor gets a fixed rate of interest annually. The Lock-in period of the fixed deposit varies from 7 days and goes up to a period of 10 years. The rate of interest on fixed deposits ranges from 5% to 7%. Taxation is done on fixed deposit interest received. The rate of interest on a Fixed Deposit is relatively higher than a normal savings account.
One of the key features of a Fixed Deposit is that the investment period is flexible to opt and the rate of interest is fixed and doesn’t change with variations in the economy or any other factors which makes it a highly risk-free mode of investment.
To invest in Fixed Deposit, the depositor needs the following documents:
- Identity Proof
- Depositor’s and Nominee’s Photograph
- Address Proof
- PAN Card
The interest on the entire investment is given by the bank to the depositor and the interval can be monthly, quarterly, half-yearly or yearly.
One can also save tax on Fixed Deposits by deducting his/her net salary up to 1.5 Lakhs by investing that in Fixed Deposits. Lowering the net salary helps in reducing the final taxable amount.
Senior citizen fixed deposit scheme
The senior citizen fixed deposit scheme is a term plan that comes with special interest rates. The interest rate offered in this scheme is 0.50% higher. If you are above 60 years, you can choose a senior citizen fixed deposit scheme. It comes with the feature of a regular pay-out option where you can earn a reliable and steady income to cope with your daily financial requirements easily. During financial emergencies, a senior citizen can also avail of a loan against the Senior Citizen Saving Scheme (SCSS). The interest rate offered in SCSS varies from 5.50% to 6.50% at a maximum for a tenure up to 5 years.
Advantages of Fixed Deposits
- Capital and inflation protection: The capital in a bank is fully protected up to Rs 5 lakh by the Deposit Insurance and Credit Guarantee Scheme of India.
- Guarantees: The interest rate is fixed and guaranteed for the duration of the deposit at the commencement of the deposit.
- Liquidity: The fixed deposit has a lock-in period but allows withdrawals on the payment of a penalty.
- Tax implications: A special type of deposit with a maturity period of five years in a scheduled bank is eligible for tax deduction under Section 80C. However, the interest earned on all types of fixed deposits is considered as an income from other sources when computing income tax except for senior citizens who are eligible to take a deduction of interest earned from bank deposits for a maximum of Rs 50,000. Effective from FY 2019-20, tax is deducted at the source on the interest income of above Rs 40,000 at a rate of 10 per cent. For senior citizens, TDS is applicable on the interest income of above Rs 50,000.
Government Bonds are the best investment in 2022
The Government Issues bonds to generate investments through debts when they require a large amount for major expenses. Bonds are issued to public so that they can give credit to the government when the government is in need of money. Certain investors varying from Individual Investors to Institutional Investors buy bonds and give credit to the government. It is done as a medium of investment as the Government takes the credit from investors with a promise to pay back with some guaranteed interests over a period of time.
The Reserve Bank of India issues Bonds to the public for purchase on behalf of the Government. The Investors get interested in Fixed Intervals for a certain period of time. Investors are paid back the interest at regular intervals known as Coupon. They receive coupons until the date of maturity and receive the invested amount on maturity. The maturity period can vary from 1 year to more than 30 years.
Government bonds are considered a low-risk involved investment instrument but at the same time, there is a risk of being left behind inflation because interest on Government bonds is on the lower side and it often fails to beat the inflation.
Government Bonds fall under the broad category of government securities (G-secs). Both the central and state government can issue government bonds. However, the bonds issued by state governments are also called State Development Loans (SDLs).
Types of Government Bonds-
- Treasury Bills- Treasury bills are also known as T-Bills, the duration is on the lower side i.e., less than one year. T-Bills are issued by the Government for 91, 182 and 364 days. The investor receives the difference between discounted value and Face Value as Profit from the investment.
- Dated Government Securities- Dated Government Securities are auctioned by the Reserve Bank of India. The Investors get interested in the investment and the rate of interest varies. These bonds have different pre-fixed maturity dates, as a result, these securities are termed dated.
- Cash Management bills- Cash Management Bills are somewhat similar to Treasury Bills but these bills are highly flexible in nature and their tenure period also depends on the financial requirement of the government. Such bills are subjected to mitigate the immediate cash needs.
Advantages of Government Bonds-
- Low Risk- Government Bonds have very low risk because the returns are assured and interest rates are also steady. Investors who are low-risk-oriented are well suited for Government Bonds.
- Returns- The returns on Government Bonds are almost good as Bank Deposits. The principal, as well as interest, is assured and Government Bonds are available for a much longer period than bank deposits.
- Regular Income- Government Bonds provide a steady flow of income at regular intervals. The interest on the invested amount is received by the investor at regular intervals till the date of maturity.
- Liquidity- Alike Equity shares, one can sell his/her shares at any point in time which makes them highly liquid in nature.
- Portfolio Management- Government Bond acts as a nice Investment instrument in portfolio management. Being highly risk-free in nature helps in diversifying the portfolio and acts as a good option for the funds one wants to allocate to risk-free investment instruments.
Disadvantages of Government Bonds-
- Low Return- Although being able to give as much return as bank deposits, the return on Government Bonds is still quite low relatively and considered a low-yielding investment.
- Inflation Risk- Often the rate of inflation stands at par with the rate of return on Government Bonds or is relatively higher than it sometimes which creates the risk of negative valuation of invested funds when adjusted to inflation.
