The modern fixed-income investments present a plethora of options based on a person’s age, income, liquidity requirement and capacity to take risk. Returns on these Investments can be fixed or variable. This article aims to have a look into the types of fixed income instruments.
Fixed income instruments may be tradeable (securities or debentures) or non-tradeable (fixed deposits in banks or postal department).
Fixed income instruments are obligations undertaken by the issuer to repay the interest and principal to the legal owner of the instrument. The time of maturity and amount to be received on maturity are known in advance. Some of the variants are bonds, debentures, fixed deposits, and small savings schemes like National Savings Certificate & Kisan Vikas Patra among others. (We have compiled a detailed analysis on some of these options separately)
Before investing in fixed-income instruments, one needs to evaluate the needs from three key perspectives – risk, returns and liquidity and match the investment options accordingly:
Some of the popular Fixed Income Instruments are:
- Fixed deposits These are the most commonly used fixed income generating instruments. These are offered by banks and non-banking financial institutions. Fixed deposits accepted by companies are called company deposits or CDs and by banks are called FDs. Interest rate offered by companies are higher compared to banks but they have lower ratings in general.
Minimum amount to start with is as little as INR 500. The tenure may range from 7 days to 10 years. Risk is lower, liquidity is higher with only meagre charges. They can easily be renewed. Tax is deducted at source as applicable. One can also opt for monthly periodic interest pay-out. Some institutions offer higher returns for senior citizens. Currently interest rates range from 5.5 % to 8 %.
- Recurring deposits Recurring deposits are commonly known as RD. These are offered by both banks and non-banking sectors. It is a kind of term deposit where in you can deposit fixed amount either monthly, quarterly, half yearly or yearly. This provides flexibility and ease of investment to individuals as they can choose any convenient amount with ease based on his affordability.
Investor can choose the amount and tenure to receive a lump sum amount along with accumulated interest on maturity. Interest rate ranges between 4% to 8%. Low risk & high liquidity.
- Bonds are issued both by Public sector as well as Private Sector. In public sector we have Government Guaranteed Bonds, PSU bonds, Commercial Papers and Debentures among others. In private sector bonds we have Corporate bonds, corporate Debentures, Inter-Corporate Deposits, Zero coupon bonds etc.
A bond is an obligation or loan made by an investor to an issuer. In turn, the issuer promises to repay the principal of the bond on a fixed maturity date and to make regularly scheduled interest payments (usually every six months).
The bond market in India is dominated by government bonds. Nearly 90% of total domestic bonds outstanding are government issuances (i.e. Treasury bills, notes and bonds), squeezing out corporate and other marketable debt securities. As far as risk is concerned, fixed income bonds like government securities are considered risk-free investments where as corporate bonds, debentures etc. vary from a range of low to moderate risk.
Bonds are used to raise money to finance a variety of projects and activities. Owners of bonds are debt holders, or creditors, of the issuer.
- Post Office Monthly Income Schemes As the name suggests, this is one of the product offered by the Postal departments working under the department of Finance Ministry. In this scheme you invest a certain fixed amount and earn interest every month.
POMIS is a low risk investment which generates income on a monthly basis. You can invest up to Rs 4 lakhs individually or Rs. 8 lakhs jointly with an investment horizon of 5 years. Capital protection is its primary objective.
Currently interest rate is 7.7% per annum, payable monthly. In case of liquidity, it has a one-year lock in period and in case of emergency you can take loan against POMI or close the account with a penalty. No TDS though taxable under Sec 80. Senior citizens have higher interest rate advantage. Any Indian citizen can invest in this scheme. Reinvestment option is also available.
- Mutual Funds Mutual Fund is a professionally managed fund. Money collected from different investors is collected and invested in stocks, shares or bonds etc. and managed collectively to earn highest possible returns. All the mutual funds are registered with Securities Exchange Board of India (SEBI) hence risk factor is less. Types of Mutual Funds depending on Investment portfolio are debt fund, hybrid and tax saving funds. Mutual Funds give higher rate of returns on investment depending on calculated risk.
- Public Provident Funds PPFs are popular long-term investment plans introduced by National Savings Organisation. It offers decent returns along with tax benefits under section 80C. PPF account can be opened by any Indian citizen.
PPF account can be opened with a minimum amount of Rs 500 upto Rs 150000. It carries an interest rate of around 8 % and compounded regularly. Partial withdrawal facility is also available.
Though it is operated for 15 years’ horizon, premature closure is available, albeit with a penalty. It can be opened in a bank or a post office and can be transferred to another branch.
- Gilt Funds are a type of Mutual Fund scheme floated by asset management companies. They hold short term or long term securities. In a broader perspective, these funds are invested in a combination of bonds, certificates of deposits, commercial paper etc.
These funds are invested in fixed interest generating securities of State and Central Governments. These are used for infrastructure building and other government expenses.
- National Savings Certificate National savings Certificate is one of the fixed income instrument which can be opened at any post office. This is suitable for small or medium savings or income group of investors. People also invest in NSC for tax savings u/s 80.
The tenure can be of either 5 years or 10 years and the minimum investment amount is Rs 100. NSCs are also low-risk investment option and have high liquidity.
- Kisan Vikas Patra Kisan Vikas Patra is a saving certificate first launched in 1998 by Indian Postal department. This was introduced to habituate people to invest in long term schemes.
Minimum amount that you can invest is Rs 1000 and beyond in multiples of Rs 1000 with no maximum limit. The tenure for this is 9 years and 4 months.
- KVP can be purchased by any adult or on behalf of a minor or as a joint holding.
- Nomination facility is available
- It can be transferred from one post office to another or from one person to another.
- It can be encashed after 2 and ½ years from the date of issue.
- 10.RBI Relief Bonds Reserve Bank of India Relief Bonds are issued by RBI for generating fixed income to the investors.
- Any individual not being a Non-Resident Indian or Hindu Undivided Family can purchase these bonds.
- The tenure for RBI relief bonds is 10 years and carries an interest rate of 7.75 %.
- Minimum amount to invest is Rs 1000 and in multiples of Rs 1000.
- Though the bonds are exempt under wealth tax, interest amount is taxable under Income Tax.
- They are non-transferable.
- They have little or no risk being backed by the central bank.