A bond is not your only option

1Four places, one rupee

Here is exactly the confusion this chapter exists to resolve, asked by a reader in a comment under Zerodha Varsity's own bond chapter:

“the average interest on bonds are 6-7 percentage as far as I know. So why shouldn't I invest in Fixed deposit of banks if the interest rate is similar or say higher sometimes? Please help, I am confused, I think FD are better than bonds and safer.”

Rishi Singh, Varsity comment, 23 May 2025

He is not wrong to be confused. Nobody sat him down and compared the options properly. So before this module goes any further into bonds specifically, here are the four real doors, named plainly.

Door one, the bank fixed deposit. What almost everyone already does. A fixed rate, a fixed term, a bank standing behind it.

Door two, a small savings scheme. The PPF account (Public Provident Fund) many people open for retirement is one familiar example. So is the National Savings Certificate, sold at a post office counter. These are the government's own retail savings products, and most Indians who hold one could not explain how it differs from a bank FD.

Door three, a debt mutual fund. A pooled basket of bonds someone else picked, bought and sold in units on any business day.

Door four, a bond held directly. What the rest of this module is about.

This chapter is the one honest comparison of all four, before the module goes deep on door four specifically. It is not a chapter arguing you should buy a bond. Some of these four doors will be the right one for money you cannot afford to see move at all, and a bond is deliberately not built for that.

2What actually protects your money

On 23 September 2019, the Reserve Bank of India took control of Punjab and Maharashtra Cooperative Bank and froze withdrawals. Depositors could take out no more than ₹1,000, from any account, of any size. The bank had hidden over ₹6,500 crore of exposure to a single struggling builder, HDIL, close to three quarters of its entire loan book.

It took over two years to sort out. The bank was finally merged into Unity Small Finance Bank in January 2022. About 96 percent of depositors eventually got their full money back. For over two years, nobody knew that in advance.

This is the story behind a number every Indian saver should know before choosing where money goes, and a forum comment shows exactly where people learn it:

“The maximum amount is 5 lacks per person per bank.”

neha1101, TradingQnA, 3 June 2021

That is the real rule, and it is worth reading precisely. The DICGC (Deposit Insurance and Credit Guarantee Corporation) is a subsidiary of RBI. It insures deposits at every bank in India, government, private or cooperative. Savings, current, fixed and recurring accounts are all covered, up to ₹5,00,000 per depositor per bank. That is principal and interest combined, not ₹5 lakh of each. Raised from ₹1 lakh in February 2020, after years at that lower figure.

After PMC Bank, Parliament also fixed how long depositors would have to wait. Here is that rule in the regulator's own words.

Figure 1

Ninety days from the day RBI restricts a bank, not ninety days from when you file a claim. That rule exists specifically because of what happened at PMC Bank, and it has already been used since. RBI froze all withdrawals at New India Co-operative Bank in Mumbai on 13 February 2025. It eased the cap to ₹25,000 per depositor two weeks later, and by that point over half of all depositors could withdraw their entire balance under that limit.

Now the part that actually matters for the choice this chapter is about.

DICGC insures banks. It does not insure anything else, at any amount, no matter how safe the product looks on a screen.

Two lookalikes are not covered at all. An NBFC (a non-bank lender, the kind that finances gold loans or vehicle purchases) can also take a "deposit," and so can an HFC (a housing finance company). Both use the word "deposit," both often carry a familiar-looking interest rate, and neither is insured, not partially, not above a threshold, not at all. Chapter 1 already gave you the scale of this: NBFC public deposits stood at about ₹1.21 lakh crore at 31 March 2025, spread across roughly 20 companies, five of which hold 97 percent of that money between them. None of it is DICGC-insured. Mutual funds, stocks and bonds were never in DICGC's scope in the first place, because they are not deposits.

3The government's other product

Somewhere in your family, somebody almost certainly holds one of these. A PPF account, an NSC certificate, or a Sukanya Samriddhi account opened for a daughter, a long-lock-in scheme meant to fund her education or wedding. Ask them who they lent that money to, and most will say the post office, or the bank branch where they opened it. Almost nobody says the actual answer.

The Government of India. The same borrower behind every government bond in this module.

The scale of this is larger than most people expect. The securities the Centre owes to its own small savings fund, the pool that holds every PPF, NSC, SCSS and post office deposit account in the country, stood at ₹35,32,873.36 crore at 31 March 2026. That is roughly 28 percent of the size of the entire government bond market. For most Indian households, this fund, not a G-sec, is their actual exposure to the sovereign.

What separates the schemes from each other is not who is borrowing, since it is the same borrower every time. It is the wrapper: how long your money is locked in, whether the interest is taxed, and who is even allowed to open one. Two more names in the table below are worth a quick gloss. SCSS is the Senior Citizens' Savings Scheme, open only past a certain age. A post office time deposit is simply the post office's own version of a bank FD.

Notice how much longer these lock-ins run than a typical bank FD. A PPF account is fifteen years. Sukanya Samriddhi runs until the account is twenty one years old. These are not products built for money you might need back next year, and unlike a bond, there is no secondary buyer you can sell an early exit to. The government fixes the exit terms by law, and they are usually far stricter than anything a bank offers on a fixed deposit.

The rates on this table move every quarter, set by the Ministry of Finance. Treat any specific percentage you see quoted anywhere, including in this chapter, as needing a fresh check before you rely on it. The lock-in length and the tax treatment change far less often, and are the more durable facts to plan around.

4The one almost nobody has heard of

There is a fifth government product that sits between an FD and a G-sec, and survey after survey of retail investors finds almost nobody knows it exists.

The RBI Floating Rate Savings Bond 2020 pays interest that resets every six months, tied to the National Savings Certificate rate plus a fixed 0.35 percentage points. For the half year from 1 July to 31 December 2026, that worked out to 8.05 percent. It carries a seven year lock-in, with a limited early exit available to senior citizens on a graded schedule. The interest is fully taxable, and it is sold on tap through RBI's own Retail Direct portal, with no minimum beyond ₹1,000 and no upper limit.

Read that rate again next to the small savings table above. It is government-backed, like a G-sec. It resets automatically, so you are never locked at a stale rate the way a five year FD leaves you. And it is bought the same simple way you would open a PPF account, through a government portal, with none of the price movement a bond carries.

It will not suit every rupee either. Seven years is a long lock-in, and unlike a bond you cannot sell it early to a stranger if your plans change. But for money you are comfortable locking away, this is worth knowing about. It comes from the safest possible borrower, at a rate that moves with the market instead of sitting fixed for years, and most people have simply never heard of it.

5Getting out early costs something everywhere

The last chapter made the central point about a bond: leave early and a stranger sets your price, which can be more than you put in or less. That is not a flaw unique to bonds. Every one of the four doors charges something for changing your mind, and the four charge in completely different currencies.

A bank fixed deposit's exit cost is fixed and known in advance. Large Indian banks typically shave somewhere around half a percentage point off your interest rate for breaking a deposit under ₹5 lakh, a full point or more above that. Some pay nothing at all if you exit within the first week. You lose a predictable amount of interest. Your principal is never at risk.

A small savings scheme's exit cost is usually a hard wall rather than a penalty. PPF genuinely locks for fifteen years, with only narrow, specific exceptions. There is no market to sell it into early. It was never designed to be sold, only held, or in narrow circumstances closed early by the rules themselves.

A debt mutual fund's exit cost is the smallest and the fastest of the four. Units are sold back to the fund itself on any business day, at that day's net asset value, which is simply the value of the bonds inside the fund on that date. There is no need to find a buyer the way there is for a single bond, because the fund is always the buyer.

A bond's exit cost, as Chapter 1 covered, is whatever the market says on the day you sell, and that number does not exist until you actually try.

Fixed and known, hard and immovable, fast and fund-priced, or market-priced and uncertain. Four different answers to the same question, and none of them is free.

6Debt mutual funds, briefly

Picture a fund holding forty different bonds from forty different borrowers, roughly ₹2.5 crore of each inside a ₹100 crore fund. If one of those forty borrowers cannot pay, you lose about ₹2.5 out of every ₹100 you hold, not the whole thing. That is the entire idea of a debt mutual fund. Instead of picking one issuer's bond yourself and carrying all of its risk alone, you buy a small slice of a basket somebody else already assembled from many.

Since 2021, SEBI (the Securities and Exchange Board of India) has required every debt fund to declare its risk ceiling in advance. It does this on a nine cell grid: how much interest rate risk the fund will take, Class I to Class III, and how much credit risk, Class A to Class C. A fund's factsheet might declare its ceiling as Class B-II, as in the example below. That is a promise about the most risk the fund will take, not a live description of where it actually sits on any given day. Still, it is the fastest way to check whether a fund's mandate matches what you actually want before you put money into it.

That is as deep as this chapter goes. Picking a fund, reading its risk grade against its actual holdings, is covered in this module's own section on debt funds.

7The rule that beats everything else here

Everything above this line assumes you have spare money and are deciding where to park it. Before any of it applies, one question has to be asked first, and it is usually skipped.

Are you carrying any debt that costs more than these four doors pay?

A personal loan in India commonly runs somewhere in the 11 to 16 percent range. Credit card debt, if any of it is revolving, runs far higher again. None of the four doors in this chapter, not the FD, not a small savings scheme, not a debt fund, not a bond, pays anywhere near that. So putting fresh savings into any of them while that debt sits unpaid is not really an investing decision. It is choosing to earn 7 percent in one hand while paying 13 percent with the other, and calling the difference an investment strategy.

Clear debt that costs more than these four doors pay before you open any of them. That single check overrides every comparison in this chapter.

8The four doors, side by side

Here is the whole chapter compressed into one table. Nothing here is a recommendation. It is what each door actually is, stated plainly enough that you can match one to money you actually have.

Four doors, one rupee. None of them is universally correct, and this chapter was never going to tell you to prefer one. A bond held directly is the one this module keeps going deeper on. Not because it is the best door, but because it is the one nobody explains properly, and the one where getting the mechanics wrong costs the most.

The next chapters go back to that door specifically. What a bond is actually paying you once you read past its coupon, how ratings work and what they leave out, and what actually happens inside a default.