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The first thing affected when a repo rate cut is announced is the return on Fixed Deposits (FDs). When the RBI lowers interest rates, banks immediately reduce the interest offered on FDs. This leads many investors to wonder if it would be better to withdraw money from FDs and invest in bonds instead. However, it's crucial to understand both the advantages and risks before making a decision.

How safe are bonds compared to FDs?
Bonds also carry risks. The biggest risk is credit risk, meaning your money could be at risk if the company issuing the bond faces financial difficulties. Government bonds are almost free from this risk because they are guaranteed by the government. However, with corporate bonds, your entire return depends on the financial health of the company. Then there's interest rate risk. If interest rates rise in the future, the price of bonds can fall. This effect is especially pronounced in long-term bonds.

Liquidity: FDs ahead, bonds behind
You can break an FD at any time. There might be a small penalty, but the money is easily accessible. This is not the case with bonds; if you want to sell a bond before maturity, you often don't get a fair price. This is why bond investments are considered less liquid. Additionally, FDs offer insurance coverage up to ₹5 lakh from DICGC, while bonds offer no such protection.

The safest option: Government Bonds
If your priority is safety, government bonds are the best option. The advantage of government bonds increases when interest rates fall, as their prices rise when their yield decreases. In India, the average yield on government bonds ranges between 5.6% and 6.7%. These are considered a safe option for those who want to avoid risk.

Corporate Bonds: Both low and high returns are possible
Corporate bonds have varying ratings. AAA-rated bonds are the safest and offer yields of approximately 7% to 8.5%. BBB-rated bonds offer returns of 9% to 12%, but they also carry higher risk. Experts suggest that investors seeking low risk should focus only on AAA-rated bonds.

What is the cost of buying bonds directly?
If retail investors want to buy bonds directly, the minimum investment amount is usually higher. It typically starts from ₹1 to ₹2 lakh. If you are investing ₹5 lakh or more, you can diversify your investment across several companies, which reduces the risk.

Where to invest?
Where to invest now depends entirely on your needs and risk tolerance. If you want safe and easily accessible money, then a Fixed Deposit (FD) is better, as it comes with a bank guarantee. But if you can tolerate some fluctuations and want higher returns than an FD, then government bonds or AAA-rated corporate bonds can be good options.

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