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MLD vs FD vs Bonds: Where should you invest?

MLD vs FD vs Bonds: Where should you invest?

Imagine standing in a supermarket, trying to choose between three different rice varieties. One promises consistent quality every time, with a moderate aroma and comes for a decent price. Another offers a better flavor, but the price and quality may fluctuate depending on the harvest season. And the third offers a mix of different grains to balance taste and nutrition. 

Investing isn’t very different. If you are looking for stable returns, the most obvious choices available today are Fixed Deposits (FDs), Bonds, and Market-Linked Debentures (MLDs). Each of these options works differently, offers different levels of risk and return, and is suitable for different types of investors.

This blog breaks down the differences between FDs, bonds, and MLDs, helping you choose the right investment instrument as per your financial goals and preferences. Keep reading.

What is a fixed deposit?

Fixed Deposits, or FDs, are arguably the most popular and traditional fixed-income investment instrument in India. They allow you to invest fixed amounts of money for specific periods and earn guaranteed returns on maturity. The returns are based on the interest you earn on your investments at pre-determined interest rates. 

For example, if you invest Rs. 1 lakh in an FD offering 7.5% interest per annum for five years, your estimated returns would be Rs. 43,563. You will receive Rs. 1,43,563 at maturity, i.e., after five years.

At the end of the investment tenure, you can either withdraw the amount invested along with the accrued interest or renew your FD for another tenure. An FD tenure may typically range from 7 days to 10 years. The interest rate depends on multiple factors, including the investor’s age, FD tenure, rating of the institution, repo rate, and other macroeconomic factors. You can also choose between cumulative and non-cumulative options. In the non-cumulative option, you can select the frequency of interest payments (monthly, quarterly, half-yearly, or annually).

Also, read – FD vs. mutual funds – Which is better for NRIs?

What are bonds?

Bonds, also referred to as investment bonds, are debt instruments issued by the government and corporate entities to raise funds. Investors who invest in bonds typically lend money to the issuer and receive periodic interest payments in return. Upon maturity, the capital is returned to the investor. There’s also a cumulative option in bonds, just like FDs, where you receive both your interest and capital at maturity.

There are two ways to invest in bonds – direct and indirect. The direct method involves purchasing bonds directly when they are issued through a brokerage platform or from the issuer’s website. The indirect method involves investing in bond funds or bond ETFs. These instruments pool money from multiple investors and invest in a variety of bonds.

Bonds issued by corporate entities have the potential to provide higher returns than fixed deposits. However, they are riskier as well. On the other hand, government-issued bonds are relatively safer, but offer lower returns than corporate bonds. 

Also, read – A complete guide to consumption funds

What is MLD?

MLD stands for Market-Linked Debentures. They are a specific type of debt instrument that does not offer fixed or guaranteed returns. Instead, the returns depend on the performance of an underlying market index, such as Nifty50, or government bonds. MLDs are typically issued by corporate entities, banks, and other financial institutions.

MLDs are of two types – principal-protected MLDs and non-principal-protected MLDs. In the case of a principal-protected MLD, the principal amount is returned to the investor upon maturity, irrespective of how the market performs. It protects your capital from unfavorable market movements, but also restricts the returns during favorable market movements. Non-principal-protected MLDs, on the other hand, do not offer a guarantee of principal repayment. Although these MLDs are riskier, they also have the potential to generate higher returns.

Due to Securities and Exchange Board of India (SEBI) restrictions, the issuance of only principal-protected MLDs is allowed in India. SEBI clarified that non-principal protected instruments do not qualify as debt securities under its regulations, so they cannot be issued or listed in India. Therefore, non-principal protected MLDs continue to be issued via private placement and remain unlisted. MLD investments can be made through online investment platforms or by contacting investment banks or distributors that sell MLDs.

Also, read – Private credit vs private equity vs public debt: Where to invest?

Fixed deposits vs bonds vs MLDs

Now that you know what FDs, bonds, and MLDs are, let’s compare these three investment instruments based on different parameters:

ParameterFixed DepositsBondsMLDs
ReturnsReturns are generally fixed and guaranteed.Returns are usually fixed, but may fluctuate if not held till maturityReturns are not guaranteed as they depend on the performance of the underlying index.
Risk LevelMinimal riskRisk may vary. Government-issued bonds are the least risky, while corporate bonds are riskier.Modest risk due to market-linked returns. Risk may vary – depending on whether it is Principal Protected or Non-Principal Protected.
LiquidityLow liquidity. Pre-mature withdrawals attract a penalty.Offers high liquidity, especially if you’re investing through bond funds or bond ETFs. However, if invested directly into bonds, the liquidity depends upon the availability of the paper in the market.Illiquid in nature.
TaxationInterest is added to your taxable income and taxed as per the applicable slab rate.Interest payments are added to your taxable income and taxed accordingly.All gains from MLDs are treated as Short-Term Capital Gains (STCG), irrespective of holding period. Taxed at normal slab rates applicable to the investor.
Suitable ForRisk-averse investors seeking guaranteed returns.Investors seeking higher returns than FDs with slightly more risk.Investors seeking market-linked returns without investing in equities.

To conclude

There is no “one that fits all” solution when it comes to FDs vs bonds vs MLDs. The right choice depends entirely on your financial goals and how much risk you’re willing to take. A healthy portfolio often includes a mix of all three, ensuring safety, stability, and growth over time.

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FAQs

How to invest in an FD?

You can invest in an FD by depositing a fixed amount and opening an FD account with a bank or a Non-Banking Financial Corporation (NBFC).

Is it safe to invest in MLDs?

MLDs are generally considered safe, as they are regulated by the Securities and Exchange Board of India (SEBI). Only principal-protected MLDs are allowed in India, which improves the safety quotient. However, non-principal protected MLDs still issued via private placement and remain unlisted.

What is the holding period of MLDs?

 

The holding period, or tenure, of an MLD may range between 12 and 36 months.

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