G-Sec disadvantages with FD

General
1

We all know how bonds are valuable and has multiple advantages than FD so not discussing them here.
This thread is to discuss the disadvantages of G-Sec with Fd.
There are two disadvantages that I see with the GSec bonds as compared with the FD…
Can anyone clarify if I am thinking in the right direction?

  1. If the government decides to hike the interest rates, the bond’s ‘par value price’ will go low coz the interest of the bond still remains the same on the other hand the FD interest is hiked which means the bonds become less attractive than the FDs . Now thinking the same reason I try to sell these bonds and recover my money…coz now I want to invest in the same Bonds but at a cheaper rate… I will incur a loss selling them at a low price than I bought. This becomes quite like the stocks…in the end there is no guarantee I am going to get is at-least what I have invested. If the vice versa happens then I can get more on the money invested however the I need to pay capital taxes. Not to forget the transaction costs involved .

  2. Lets say I want my money back and I have an emergency I want it tomorrow. I have bought 2051 expiry bond and today is 2035 .If I want to sell the bonds the very next day I wouldn’t be able get the cash. It depends on liquidity right ? Some one else has to buy my bond. He is going to bid higher/lower based on the price at that time . Lets say the above case-1 has happened multiple times, I have bought the bonds of expiry 2051 at 2018 @ Rs.99(this is the par value-got it at a discount yay!) at 7.4 % interest

2022-interest hiked . I decided not to sell my bonds. Because of the hike the bond prices becomes Rs. 98
2025-interest hiked . I decided not to sell my bonds. Because of the hike the bond prices becomes Rs. 97
2028-interest hiked . I decided not to sell my bonds. Because of the hike the bond prices becomes Rs. 97
2034-interest hiked . I decided not to sell my bonds. Because of the hike the bond prices becomes Rs. 95

Now at 2035 if I have an emergency and want to sell my bonds to get the cash back I the following disadvantages

a. I received lot less than the invested amount. Yes I have received interest all though the years but interest has been constant and the interest received was much less if I have invested the sum in FD coz of rising interest rates.
b. Liquidity? I cannot chose to sell the bonds until there is a buyer …correct? The GOI is not going to buy my bonds instead I need a buyer in the secondary market.

So how I see it is that once interest rates are hiked/similar events which makes the bond price go low… its always favourable to sell you bonds you hold as soon as possible now and buy them back at a lower price. This would incur transactions cost but in-return saves you from a big pain of losing your capital going forward

1 Like
2

Actually there’s no disadvantage if you know what you are getting into.

Stocks are volatile & can ruin your investment. But still people invest.

So if you know what & why you are buying then there’s no disadvantage.

See about your first point. The value will go down indeed but you will lose money only if you sell. Assume that after a year govt reduce rates then you will be in profit.
It’s about perception.

3

What happens if you repeat your premature withdrawal scenario with a FD?

4

@akash_mehrotra I am going to get back the money which I invested-the principal with the interest upto the quarter when I am withdrawing .I do-not have to think who is going to bid/ask my FD and I am also not gonna pay any transaction costs . Taxes are cut as usual.The only loss is I am not going to get the interest of the quarter I am withdrawing the FD. Also if I somehow stay with my FD for the quarter and withdraw the money right after(1-2 days) the quarter date I get back the interest of the quarter as well.

5

Supporting your logic , drugs are risky and can ruin your life , but still people take it. Doesn’t make it logically right.

Its never about perception.

6

There will be a penalty for premature withdrawal.

7

Taking drugs are necessity जंतु also taken when we should take it. But investing in volatile market isn’t necessity जंतु, it’s our choice, am i clear जंतु?

8

What I meant about perception was you may incur loss only if you sell. Not about about stocks.

What I meant by people invest is that they find value in the stock and find it attractive for the long term.

9

Gsec there’s no premature withdrawal

10

My answer was related to akash mehrotra stated above.

11

@sabyasachi_sadhu get on dude! I have seen u feel bad when some one poses opposite viewpoints that yours. You think that what you do is right. This is a post just for evaluation . No one is taking your money and running. Don’t be so hell bent on what you think right. Have an open mind and stop taking offence when no one is offending you. I have seen you lately on this forum u attack once you see your ideas are not taken . People are different and they think differently that you . If you cannot get this , then stop using the platform.

12

Some banks charge penalty for pre-mature withdrawal of FD. Most PSU banks don’t

13

Most PSU Banks are entitled to deduct 1% as penalty if withdrawn before maturity.

14

Agree. A need to sell when rates have just increased will lead to lesser recovery as bond prices will go down.

Liquidity is a major issue to begin with. There does not seen to be a ready mkt even as NSE has just permitted retail investors. Instant marketability will take time ! Brokerage structure on selling and stamp duty in general is not clear. Upon buying/investing it is indeed Rs. 6 per 10,000