Bond Yields Pay 10%, Fixed Deposits Just 7%: Is Chasing The Extra 3% Really Smart?

Ten per cent looks better than seven per cent. That's just math.

But money doesn't work like that. Not always.

Right now, plenty of corporate bonds are advertising yields near 10 per cent. Your bank FD, meanwhile, is sitting quietly at 7 per cent. On paper, the bond wins. In your head, you're already spending the extra 3 per cent.

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Slow down for a second.

That extra 3 per cent isn't a gift. It's a payment. And like every payment, it's for something.

Why The 10% Bond Exists In First Place

Every bond's yield is built on a base. In India, that base is the 10-year government security, or G-Sec, currently hovering around 7 per cent. Anything above that base is called a credit spread -- and it exists for one reason: risk.

AAA-rated corporate bonds today yield roughly 7.5 to 9 per cent. AA-rated bonds pay more. Lower-rated paper pays more still. So if a bond is offering you a flat 10 per cent, it usually means one thing.

You've quietly slipped down the credit rating ladder.

Mohit Gupta, Co-Founder, CTO & CPO at EquiRize Securities, told NDTV, "The right question is not whether an extra 3 per cent is worth it. Extra yield is not a bonus, it is the price you are paid for taking on risks a fixed deposit does not carry."

Three Risks Hiding Behind That Yield

According to Gupta, three things drive the spread between your bond and your FD. 

• Credit risk: This is the chance the issuer simply can't pay you back. The rating gives you a starting point -- but it's not a guarantee. Ratings can be wrong. Ratings can be downgraded.
• Interest-rate risk: Longer bonds swing harder when interest rates move. Buy a 10-year bond and need your money in year two? You could be selling at a loss, even if the issuer never defaults.
• Liquidity risk: Can you actually exit before maturity? For many corporate bonds -- especially smaller issues -- the honest answer is: not easily.

The FD Isn't Boring. It's Insured

Here's the part most yield-chasers skip.

Bank deposits come with a safety net. The DICGC insures your FD up to Rs 5 lakh per bank. If the bank collapses, that amount is protected by law.

Corporate bonds carry no such insurance. None. If the issuer defaults, you're in line with other creditors -- hoping for a recovery that may never fully come.

There's also the tax angle. Both bond coupons and FD interest are largely taxed at your income slab. So after tax, that flashy 3 per cent gap gets smaller than the brochure suggests.

So, Is the Extra 3% Worth It?

Gupta's answer isn't a yes or a no. It's "it depends on you."

"Whether that trade is worth it is not the same answer for everyone; it depends on your risk profile, income stability and time horizon."

If you have a steady income and years before you'll need the money, taking on measured credit risk for extra yield can make sense.

If you might need that cash soon -- or simply can't stomach the idea of a default -- stick to higher-rated, shorter-tenure bonds. Or just take the FD.

Before You Chase The Yield

Gupta lays out a simple checklist:

• Read the rating and the reason behind it, not just the letter grade
• Match the bond's tenure to your actual time horizon
• Plan to hold to maturity, not to trade your way out early
• Know who the issuer actually is, and what they do

"The extra 3 per cent can be worth it, but only when it fits your risk appetite and you can name the risk you are taking for it. A 10 per cent you do not understand is more expensive than a 7 per cent you do."