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13 Jul, 2023
5 mins read
Slow and steady wins the race.
An adage that has significantly influenced a large set of investors to invest their funds in fixed deposits (FDs), believing it to be the most reliable and safest way to earn passive income. Well, the money arriving like clockwork is undeniably appealing to all.
And why not!
In the realm of finance, banking institutions have always demonstrated a commendable level of credibility and were regulated by the esteemed Reserve Bank of India. They have been the go-to avenue for secured investments, with Bank FDs holding paramount trust in investors' minds.
After all, the allure of guaranteed returns and protection against inflation seemed hard to resist.
But here's a jaw-dropping revelation!
In the unfortunate event of a bank going bankrupt, clients are protected only up to ₹5,00,000!
Yes, you heard it right, just five lakh rupees! Anything above that is not insured and is unsecured. For example, if you deployed your life savings of Rs. 50 lakhs in a bank FD of 1-year tenure and the bank became insolvent before the tenure, you as a deposit holder are eligible to receive only Rs. 5 lakhs (10% of your total deposit amount in this particular example).
When investing hard-earned savings, it pays to know these finer details to deal with the inherent risks which go unnoticed by most people. The best way to safeguard your savings is by investing in debt instruments like G-Secs which are backed by the sovereign guarantee of the government. Despite the safety aspect, in many situations, you can earn higher interest by investing in Government bonds than Bank FDs. The public is mostly unaware of this anomaly.
Government securities or G-Secs(Treasury bills, dated securities, state development loans) are debt financial instruments issued by the Reserve Bank of India (RBI) on behalf of the government of India (GOI) to fund the economic activity and achieve the long-term objectives of the country's economy.
Investors can earn more or similar interest from government securities as compared to Bank FDs. Other than that, your G-Sec investments are safely stored with the Depository (CDSL/NSDL). If you are the kind of high-risk investor who trades derivatives, you could also pledge G-Secs with a minimal haircut (2-10%) as cash equivalent collateral to trade F&O.
On the contrary, it's worth noting for traders that you can't pledge Bank FDs to trade F&O as the clearing corporations/Exchanges don't accept 'Third-party FDs' as collaterals. Clients of brokers are considered 'Third Parties. Besides that, investors don't incur any additional cost of holding government-backed debt instruments.
There are a few reasons that FDs are still stigmatized in India:
Lack of Awareness.
To your amusement, the US debt market is bigger than the equity market, with a total value of over $50 trillion, but the scenario is opposite in the Indian market.
Indian debt markets are like an untapped territory.
It is majorly because many investors in India are not aware or reluctant to explore other debt market instruments available in India. This lack of awareness has locked their major set of savings into FDs, offering lower returns.
High-pressure Sales Tactics
Some banks use high-pressure sales tactics to sell FDs to investors. This can lead to investors buying FDs even when they are not the best investment for them.
Large Banking Network
For some investors, the convenience of having access to a large banking network can be a major factor in their decision to invest in FDs. This is because it can make it easier to open and manage an FD, and it can also provide peace of mind knowing that you can access your money if you need to do so.
Now, let's embrace the superior advantages of G-secs and witness a financial world where money works harder, grows smarter, and stays safer.
Here's a list of benefits of investing in G-secs over FDs:
Higher Returns.
G-Secs typically offer higher interest rates than FDs, especially for longer tenures. For example, as of June 2023, the average 10-year G-Sec yield is around 7.11%, while the 10-year FD rate of a large bank is about 6.25%. So, if you invest ₹1,00,000 in Bank FD, then you will earn interest of ₹62,500 per year, while if the same amount is invested in G-sec, then interest earned would be ₹71,100 per year. And this means you can earn more interest income from G-Secs than FDs for the same amount and duration.
Moreover, G-Secs have the potential to appreciate in value when the market interest rates fall, as the bond prices move inversely to the interest rates. It can result in capital gains if you sell your G-Secs before maturity. On the other hand, FDs do not have any capital appreciation potential as they pay a fixed interest rate throughout their tenure.
You can now easily invest in G-secs via FYERS platform.
Tax Implications.
G-Secs are more tax-efficient than FDs.
Let's understand this with the help of a table:
|
Criteria |
FDs |
G-Secs |
|
Interest Earned |
Subject to TDS of 10% if interest income exceeds ₹40,000 and ₹50,000 for senior citizens |
Not subject to TDS |
|
Taxation |
Considered income from other sources and taxed at the applicable individual slab rates. |
Appreciation in G-Secs prices is considered a capital gain. If held for more than a year, long-term capital gains get taxed at 10%. If held for less than a year, short-term capital gains get taxed at the applicable income tax slab rates. |
|
Example |
You invest ₹10 lakhs in a tax-saving FD with a maturity of 5 years. If the interest rate is 8%, you will earn ₹80,000 in interest over the 5 years. However, since the interest income is subject to TDS of 10%, you will have to pay ₹8,000 in TDS upfront. You will also have to pay tax on the interest earned when you redeem the FD. The amount of tax you pay will depend on your overall income and tax bracket. |
You invest ₹10 lakhs in a G-Sec with a maturity of 5 years. If the interest rate is 8%, you will earn ₹80,000 in interest over the 5 years. Since the interest earned is not subject to TDS, you will not have to pay any tax on it upfront. However, you will have to pay tax on the interest earned when you redeem the G-Sec. If you hold the G-Sec for more than a year, you will pay a long-term capital gains tax of 10% on the appreciation in the price of the G-Sec. If you hold the G-Sec for less than a year, you will pay a short-term capital gains tax at your applicable income tax slab rate. |
Pledging Cost.
Pledge to trade is an exciting benefit for investors aspiring to trade in stock markets.
G-Secs are also more cost-effective than FDs when using the amount released from pledging for trading in stock markets. FYERS does not charge any interest for holding overnight positions using the margin from G-Secs. In contrast, other brokers charge interest of around 18% p.a. (0.049% per day) for holding overnight positions using the margin from FDs. This means you can save on the interest cost and increase your net returns from trading.
For instance, suppose you invest ₹10,00,000 in G-Secs 8.24% GOVT.STOCK 2027 through the FYERS platform and pledge them for a ₹9,50,000 margin (5% haircut). Then you use this margin amount to buy ten lots of Nifty Futures at ₹19,000 and sell them at ₹19,050 the next day, making ₹25,000 profit. With FYERS, you pay no interest for the overnight position because G-Secs are considered cash equivalent securities upon pledging to trade F&O.
Whereas, if you invest ₹10,00,000 in FDs and pledge them for a ₹10,00,000 margin (0% haircut), you make the same trade but pay ₹490 (0.049% of ₹10,00,000) interest per day. Your net profit is ₹24,510 (₹25,000-₹490). Interest charges reduce your returns from trading. So you can see how the interest charges for overnight positions can affect your overall trading expenses and reduce your net returns. By investing in G-Secs through FYERS and pledging them for trading in stock markets, you can avoid these charges and increase your profitability.
Also, unlike other stockbrokers in India, there is no minimum investment requirement or additional cost of pledging government securities.
You can now pledge your government securities with FYERS and never miss a trading opportunity. Also, to know more about the haircut applicable, click here.
Higher Liquidity
G-Secs are more liquid than FDs, as they can be bought and sold quickly in the secondary market through trading platforms like FYERS. You can also invest directly via the FYERS platforms in the secondary market. That allows you to exit your investment anytime without penalty or loss of interest.
On the other hand, FDs have a fixed tenure and impose a penalty for premature withdrawal. The penalty percentage can range from 0.5% to 2% of the deposit amount, depending on the bank and the tenure. You must forfeit some interest income if you break your FD before maturity.
Higher Safety
G-Secs are safer than FDs, as they carry very low default risk and are backed by the government's sovereign guarantee. Rest assured, you will receive your principal and interest payments on time and in full.
On the other hand, FDs carry a credit risk depending on the issuer's financial health. Although FDs are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to ₹5,00,000 per depositor per bank, this may not be sufficient to cover your entire deposit amount in case of a bank failure.
Additional Read: Is investing in Government Securities an Attractive Proposition?
Inflation beating investments is the need of the hour.
As the rising inflation rates loom over the financial landscape, it becomes increasingly crucial to choose investments wisely. In this regard, Government securities have emerged as a powerful contender, surpassing FDs in various aspects. Backed by sovereign guarantees, higher returns, lower taxes, and safety, G-secs can insulate a portfolio against the volatile movements of the stock market.
So, as you embark on your investment journey, embrace alternative investment options like G-secs with FYERS and maximize your returns!
If you are new to FYERS, click here to open an account instantly.
Government securities are issued by the government of a country to raise money. In India, the central government and the state governments both issue government securities. RBI acts as the agent of the government for issuing and managing government securities. The central government issues treasury bills, dated securities, and bonds. Treasury bills have maturities of one year or less, while dated securities have maturities of one year or more.
Pledging of government securities is a process that allows traders to use their government securities as collateral to borrow money from a bank or other financial institution. This can provide traders with access to additional funds that they can use to trade.
Pledging of government securities can help traders by providing access to additional funds, increasing leverage, and reducing risk.
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