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At the Mint Money Festival in Mumbai on 14 February, Vineet Agrawal, co-founder of Jiraaf, an online platform that allows retail investors to access high-yield fixed-income opportunities, explained how these instruments fit into modern portfolios.
Difference between FDs, CDs and bonds
FDs remain India’s largest financial asset class, larger even than equities. That dominance, according to Agrawal, has everything to do with legacy. “For our parents’ generation, FD was the default,” he said. It was simple, predictable and felt safe. But today’s investor has more choices, and fixed income itself has evolved.
At its core, the difference between an FD, a CD and a bond lies in one basic question: who are you lending to?
When you put money in a fixed deposit, you are lending to a bank. The bank promises to return your principal with interest after a specified period. CDs are similar instruments issued by financial institutions, though they are more common in money markets and among ultra-high-net-worth investors.
A bond, by contrast, is a loan to a company or a government entity. Large, highly rated companies such as the Reliance or Tata groups may issue bonds, as may mid-sized firms with lower credit ratings. Retail investors today have access to these instruments directly, enabling them to lend to companies at a predetermined interest rate for a specific tenure.
Liquidity is another differentiator. FDs are relatively liquid, and premature withdrawal is possible, albeit with a penalty. Bonds, like shares, are transferable. They can be sold in secondary markets before maturity, offering flexibility to investors who may need funds mid-way.
Safety net or growth engine?
For decades, fixed-income instruments were seen primarily as safety nets. But with certain small finance banks offering senior-citizen FDs at rates as high as 9% or more in recent years, and corporate bonds offering double-digit yields, the question arises: should fixed income be viewed as a return-generating asset class?
Agrawal’s answer was clear: “every asset class must be viewed through a portfolio lens… Allocation to fixed income depends on age, income stability and financial goals. A young professional in her 20s or 30s can afford a lower allocation. As one moves closer to retirement, that allocation should rise,” he added.
However, he cautioned against over-reliance on traditional FDs. “FDs, by their nature, rarely beat inflation,” he said. If an investor parks all surplus funds in FDs, purchasing power erodes year after year.
The right role for FDs, in his view, is for emergency funds. A three- to six-month expense buffer can sit comfortably in an FD or a liquid fund, providing immediate access without market risk. Beyond that, surplus capital should be deployed more strategically, he said.
Fixed income also shines in short-term cash flow planning. Unlike equity or real estate, which require long holding periods to smooth volatility, bonds are ideal for short durations. If an investor has a one- or two-year goal, equity markets may not cooperate within that window. Bonds and other fixed income instruments provide predictability in such a situation.
Agrawal illustrated this with an example. Suppose an investor buys a two-year corporate bond offering a 12% annual coupon paid monthly. The investor knows exactly what cash flow will arrive and when. This clarity aids planning in ways that volatile asset classes cannot.
For long-term wealth creation, assets such as equities and real estate have strong track records over decades. But for short-term allocation and income generation, fixed income instruments remain unmatched.
Direct bonds vs debt funds
When it comes to debt investments, a common question is: why not just pick a debt fund over a direct bond portfolio?
Agrawal said debt funds can, in certain segments, outperform a direct bond portfolio. However, debt mutual funds, especially liquid funds, typically invest in highly rated AAA securities and maintain cash to meet redemptions. This conservative structure can compress yields.
An individual constructing a diversified bond portfolio across A and AA rated companies can earn 200 basis points or more above liquid funds, Agarwal said. “The absence of an expense ratio in a bonds portfolio further boosts net returns,” he added.
However, this approach requires careful credit assessment and diversification. Just as equity investors diversify across large, mid and small caps, bond investors should diversify across rating categories. AAA, AA, A and even select BBB rated instruments can coexist within a well-constructed fixed income portfolio.
Even with bank deposits, interest rates offered by large public or private sector banks can be much lower compared to those offered by cooperative banks. Explaining the disparity, Agarwal said the difference lies in risk and credit perception. Large institutions such as SBI or HDFC Bank can borrow at lower rates because depositors perceive them as safer. Cooperative banks, with smaller balance sheets and potentially higher risk profiles, must offer higher rates to attract funds.
Investors must weigh this trade-off carefully. Commercial bank deposits are insured up to ₹5 lakh per bank under India’s deposit insurance scheme. Cooperative bank coverage and financial strength may differ. A higher rate often signals higher underlying risk.
Agrawal suggested that investors seeking better returns than traditional FDs consider high-quality corporate bonds issued by financially strong companies instead of chasing elevated rates from weaker institutions.
How to add fixed income to your portfolio
Say you decide to allocate 20% of your portfolio to fixed income. How should that be split?
Agrawal recommended keeping only the emergency corpus in FDs. “FDs are not obsolete, but should be looked at as only one component of a broader fixed income strategy,” he said, adding that CDs are largely irrelevant for retail investors. Beyond emergency reserves, fixed income allocation should resemble an equity portfolio in its diversification, he added.
Just as equity investors blend large caps, mid caps and small caps, bond investors can blend AAA, AA and A rated securities. Such a diversified bond portfolio can potentially generate higher returns than FDs. “You can get a delta of four to five percentage points over FD rates,” Agarwal said.
This higher yield, combined with disciplined allocation, can strengthen any portfolio, allowing investors to preserve capital for short-term needs while enhancing returns within acceptable risk limits.
In a market where equities have captured the imagination of investors, fixed income deserves equal attention. Understanding who you are lending to, how liquidity works, what credit ratings signify, and how different instruments align with different time horizons can transform fixed income from a passive parking lot into an active portfolio stabiliser.
