Fixed Income refers to the generation of a fixed stream of income basis the investment that is made by a person keeping in mind their investment objective. While equities are lucrative for growth capital, fixed income is considered to be steadier. Depending on investment purpose, there are various fixed income tools which are available in India.
Government-backed savings schemes: Government schemes offer lucrative interest rates in an extremely low-interest rate scenario. These schemes include the Senior Citizens Saving Scheme (SCSS), Post office monthly income scheme (POMIS) & Pradhan Mantri Vaya Vandana Yojana Scheme ( PMVVY ). PPF is also a lucrative option as it helps in tax savings as well.
These schemes offer interest rates from 6.6 % to 7.4%. Another added advantage of these schemes is the tenure of payouts being monthly /quarterly or on maturity. However, one must keep in mind that interest earned on some of these securities is taxable in nature, but offer higher interest rates as compared to Bank FD or savings account.
Debt Mutual Funds: Debt mutual funds are mutual funds that invest in fixed income-generating securities such as treasury bills, commercial papers, and corporate bonds. These come with a pre-decided investment maturity amount. Although these mutual funds yield slightly higher returns depending on the investment grade, they are subject to certain risks such as default risk and liquidity risk. One must also read into the pedigree of the fund manager. Off late, we have witnessed certain accidents happening in the debt mutual fund space.
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PSU Bonds: PSU bonds are debt instruments issued by Public sector enterprises. These bonds typically tend to offer bond yields on the higher end of the interest rate spectrum. These bonds tend to have a higher maturity period. Some of these bonds are also traded on the recognized stock exchanges. Although liquidity of these bonds could be an issue. Also, these bonds are available over the counter from some brokers who deal in such bonds. While they offer high bond yields, this could also be on account of the poor financial health of the company as a result of which they find it difficult to raise money from the market at prevailing rates.
Corporate Bonds and FD: Corporate Bonds and FD’s are a mechanism where an investor is lending their money to a company (not a bank). These companies offer a few percentage points of interest higher than the typical bank FD’s. However, the risk involved with these instruments is higher. One must also not solely rely on the credit rating of the issue before subscribing to such bonds & it is important to consider other factors as well.
The above cover the general investment options when it comes to investment in fixed income instruments. Interest rates and taxation are vital factors which one must consider before investing as inflation-beating or matching is very important. If an investment is unable to do so, it is practically causing one’s capital to depreciate over a period of time. The portfolio mix is important for the growth and preservation of capital; hence, debt instruments are critical to construct a stable portfolio mix.Also Read: How To Earn Regular Income Through Stock Markets