Shares make you a part-owner. Bonds and fixed deposits work differently: you lend money to someone and they promise to pay it back with interest.
Fixed deposits
In a fixed deposit, you lend money to a bank (or a company) for a fixed period, such as one year, at a rate stated up front. At the end you get your money back plus interest. If you withdraw early, there is usually a penalty. Deposits in banks are insured by DICGC, a subsidiary of the RBI, up to ₹5 lakh per depositor per bank (principal and interest together). Company FDs are not covered by that insurance.
Bonds
A bond is a loan that can be traded. A bond has a face value, a coupon (the interest rate, paid regularly) and a maturity date when the face value is returned. Governments issue bonds, called government securities or G-secs, and companies issue corporate bonds.
Why bond prices move
Suppose you hold a bond paying 7%, and new bonds start paying 8%. Buyers will pay less for your 7% bond. So when interest rates rise, existing bond prices tend to fall, and when rates fall, they tend to rise. If you hold to maturity, you still get the promised amount, if the borrower can pay.
Credit ratings
Rating agencies such as CRISIL and ICRA grade how likely a company is to repay. Higher grades mean lower expected default risk and usually lower interest; lower grades pay more because the risk is higher. Ratings are opinions and can change.
Risks to know
- Default risk: the borrower may not repay.
- Interest-rate risk: bond prices fall when rates rise.
- Inflation: if interest is below inflation, buying power falls.
- Liquidity: you may not be able to sell some bonds easily.
Tax
Interest is generally taxed as income at your slab rate. See taxes on gains. This page explains how these products work; it does not recommend any of them.