Fixed Income Instruments

on






Fixed Income Instruments are those which generates periodic and guaranteed returns. There are large avenues for fixed income in India.



1. High Yielding Savings Accounts: High Yielding Savings accounts are those accounts which provides high savings account interest rate (4-7%). Ideal to maintain your day-to-day expense and Emergency Funds.

Pro's
  • High Liquidity.
  • Regular income monthly or Quarterly
  • Income Tax deduction upto 10,000 (80TTA) & upto 50,000 for senior citizens (80 TTB).
  • Savings in banks are covered with DICGC for upto 5 Lakhs.
Con's
  • Returns don't beat inflation.
  • Income is taxable as per your slab above deduction limits.
2. Fixed Deposit: Bank Fixed Deposit is simplest & traditional form of fixed income instrument in India. They are ideal for Emergency Funds. FD can are available as

  • Regular FD

Pro's
  • Interest rate is guaranteed upfront.
  • High liquidity. Can be withdrawn when required.
  • Ease of Deposit at convivence of home from mobile/ website.
  • Tenure can be chosen from days to years.
  • Payment frequency can also be chosen.
  • Can avail OD Loan on FD/ Secured Credit Card & continue earning interest.
  • FD in banks are covered with DICGC for upto 5 Lakhs

Con's
  • May not given inflation beating returns.
  • Income Tax is as per your slab.
  • Premature withdrawal penalty may be applicable on breaking the FD.
  • Tax Saver FD: Lock in period of 5 years. Claim 80C deduction upto 1.5 Lakhs/annum.
  • Floating Rate FD: Banks have also started to innovate FD to attract investors. Banks like Yes Bank is providing Floating Rate FD where the interest rate is linked to repo rate plus a mark uprate. This results in immediate transfer to repo rate adjustments to the FD. It becomes attractive to investors during rising interest rate cycle where you dont have to locked in lower rate.

3. PPF: It is Govt of India Guaranteed Risk free long term Fixed instrument with tax benefits. Ideal for term goals like retirement, child education, children's Marriage etc. The maturity duration is 15 years. Later in can be extended in blocks of 5 years with or without further contribution.

Pro's
  • High degree of capital safety. Guaranteed by Govt. of India.
  • Contribution can be as low as 500/annum.
  • Income Tax Benefit: PPF has EEE status. Means you can claim deduction upto 1.5 Lakhs for investments (80C), Interest earned, and Maturity amount is also tax free.
  • Loan facility is available from 3rd to 6th Financial Year.
  • Partial withdrawal available from 7th Financial Year.

Con's
  • Poor Liquidity: Corpus from PPF cannot be accessed for Emergency except as loan during the 3rd to 6th FY or partial withdrawal after 7th FY.
  • Inflation Risk: Though PPF has an inflation risk due to interest rate, Govt tends to keep the interest rate attractive for small savings scheme and tax benefits gives unparallel advantage than all other long term investment forms.
  • No regular income.

4. Sukanya Samridhi Account (SSA): It is Govt of India guaranteed small savings scheme for girl children. This scheme has the one of the highest interest rate offered by Govt of India. Investment is locked in until the child reaches 21 years of age. Though instrument has a lock in period it designed to safeguard the education and future of the girl child which makes it unique product.

Pro's
  • High capital safety. Guaranteed by Govt. of India.
  • Guaranteed returns.
  • Invest as small as 250.
  • Income Tax Benefit: PPF has EEE status. Means you can claim deduction upto 1.5 Lakhs for investments (80C), Interest earned, and Maturity amount is also tax free.
Con's
  • Low liquidity: You cannot withdraw before maturity. Except after attaining 18 years of age amount upto 50% balance of previous FY to meet fee or other charges.
  • No Regular Income
5. NSC: National Savings Certificate is a Govt of India Guaranteed Risk free long term Fixed instrument with tax benefits. Investments gets matured by 5 years. Ideal for conservative or senior citizens.

Pro's
  • High capital safety. Guaranteed by Govt. of India.
  • Guaranteed returns.
  • Invest as small as 1000.
  • Claim deduction under 80C upto 1.5 Lakhs.
Con's
  • No liquidity: You cannot withdraw before maturity.
  • May not beat inflation.
  • No regular Income.

6. Senior Citizens Savings Scheme(SCSS): It is Govt of India guaranteed small savings scheme for Senior Citizens. Senior citizens aged above 60 or retired individuals above 55 years can deposit the amount within 1 of receipt of retirement benefits. It is one-time lumsump investment scheme. Maximum of 15 Lakhs is permitted, the cap has raised to 30Lakhs in 2023 budget. Interest shall be paid every quarter. Interest rates are revised & notified by government of India every quarter. Account matures by five years & can be extended in blocks of three.

Pro's
  • High capital safety. Guaranteed by Govt. of India.
  • Guaranteed returns.
  • Regular Income: Quarterly payout.
  • Invest as small as 1000 to 30 Lakhs.
  • Claim deduction under 80C upto 1.5 Lakhs.

Con's
  • Low Liquidity: Though premature withdrawal is available it comes with a penalty.
  • TDS is applicable if income is above 10,000 and taxed as per slab.

7. RBI Floating Rate Savings Bond: It is a RBI guaranteed fixed income instrument with highest degree of safety. It is ideal for risk free regular income generation. The interest rate are revised biannually with spread of 35bps above NSC Interest rate. The investment is locked in for a period of 7 years.

Pro's
  • High capital safety. Guaranteed by RBI
  • Guaranteed returns.
  • Regular Income: Biannual Payout
  • Invest as small as 1000.
  • Can be invested from banking app/ website.

Con's
  • No Liquidity
  • No Income tax benefit. Taxed as per slab.
  • TDS is applicable.
8. Government Bonds: Govt. Bonds are debt instruments issued by Govt. of India & carries a sovereign guarantee. There are various types like T-Bills / G-Secs/ State Govt Bonds.T-Bills are zero coupon bonds and taxed as capital gains. Interest from G-secs are taxed as per your slab. Bonds when sold in secondary market attracts capital gains taxation.

Pro's
  • High capital safety. Guaranteed by Government.
  • Guaranteed returns.
  • Invest as small as 1000.
  • Can be invested from RBI Direct Glit Account. No need for demat account.
  • Can be traded in secondary market.
  • Can invest on variety of instruments with maturity varying from 90 days to 10 years.

Con's
  • Returns can be lower than other debt instruments like corporate FD.
  • No Income tax benefit. Taxed as per slab.
  • TDS is applicable.
  • Market risk: Selling bonds on secondary market when interest rate rises can lead to decrease in bond prices. To avoid any market loss keep it till maturity.
  • No tax benefits.
9. Debt Mutual Funds: Debt Mutual funds invest in various debt securities like T-Bills, G-Security, SDL, Corporate Deposit. So its diversified basket of debt instruments. Various debt instruments are available and investors can choose according to the time duration of investments like overnight funds, liquid funds, ultraliquid funds, short term debt funds, Glit funds etc.

Pro's
  • High liquidity
  • Well diversified
  • Can invest through SIP Mode
  • Debt MF when held more than 36 months are considered as long term capital gains and charged at 20% with indexation benefit. It save tax es[ecially for those in high tax bracket.
  • Hedge: Acts good hedge during volatile equity markets.
  • Regular Income: Dividend option can fetch you regular income.
Con's
  • Interest Rate Risk : Debt mutual fund NAV are influenced by market condition. During interest rate raising cycle the bond decreases and there by decreasing the NAV.
  • Credit Risk : If the debt issuer doesn't pay back the MF it can lead to loss of capital.
  • Dividend distribution are taxed as per slab now
10. Corporate Bonds / Non Convertible Debentures (NCD) : They are debt instruments issued by corporates, they can be listed or unlisted, secured or unsecured instruments. The NCD are usually rated by credit rating agencies. The NCD provide higher return than FD with moderate risk. It is advisable to invest in listed, secured and AAA to BBB rated NCD.

Pro's

Good liquidity: Listed NCD can be traded actively.
Well diversified.
Hedge: Acts good hedge during volatile equity markets.
Regular Income: Dividend option can fetch you regular income.
Secured NCD are backed by assets to cover incase of any default.

Con's
  • Interest Rate Risk : Debt mutual fund NAV are influenced by market condition. During interest rate raising cycle the bond decreases and there by decreasing the NAV.
  • Credit Risk : If the debt issuer doesn't pay back the MF it can lead to loss of capital.
  • Interest Income is charged as per tax slab.
  • Requires demat account.
11. Corporate Deposit: CD are debt instruments issued by deposit taking corporates to raise funds. They work like FD and comes with fixed interest rate and variable tenures which the investor can choose. Generally, CD gives higher interest compared to bank FD. The debt instruments are rated by credit rating agency periodically. AAA rated CD are generally safe. PNB Housing Finance, Bajaj Finance, Mahindra Finance, LIC Housing finance are some corporates which provides CD.

Pro's
  • Guaranteed & Regular Income
  • Better retuns than bank FD
  • Can avail loan on FD
  • Not affected by market volatility

Con's
  • Moderate Risk
  • Credit Risk
  • Taxed as per slab.
  • Premature withdrawal can attract penalty.
  • Not listed in market like NCD.

12. P2P Lending: It is debt instrument where one lends to another person through RBI approved P2P platform. They offer great returns with higher risk of default. Liquiloans, lendbox, faircent etc are some P2P lending platforms. Here they provide a platform for lender and borrower to choose and lend wisely. But default is risk. 12% Club, Mobikwik Xtra, CRED Mint are some of the innovative platform where investor deposit they are money and the pool is used by the RBI licensed P2P lender(Lendbox, liquiloans) to lend to multiple customers . The amount can be as low 100rupees to mutiple borrowers, thereby effectively diversifying & reducing the default risk.

Pros's
  • High Liquidity
  • Regular Income
  • Higher rate than FD & NCD
  • No affected by market volatility
  • No need for demat account
Con's
  • Higher Risk.
  • Credit Risk.
  • Taxed as per slab.


What are safe debt instruments?

  • Safest debt instruments are PPF, SCSS, NCS, SSA,RBI Floating rate savings bond, G-Sec as they guaranteed by Govt. of India.

Where can I know more about various Govt. Schemes?


What is best debt instrument to keep your Emergency Funds?
  • Savings account, FD, Liquid Mutual funds
  • What are the best options to earn regular passive income?
  • NCD & Corporate deposit offers good risk adjusted regular income options.
  • P2P lending through 12% Club, Mobikwik Xtra, CRED Mint can be tried for higher yield with slightly high risk.
  • G-Sec & RBI Floating savings bonds can be considered risk averse individuals.
What are the best options for elderly individuals?
  • SCSS is the best option for senior citizen.
  • Also consider RBI Floating Rate Savings Bond /NSC as well.
  • Also can try G-Securities.
  • Keep some funds in Savings account & FD to meet emergency upto 5L.

What is the best debt instrument for retirement, education, marriage ?
  • Young investors choosing debt instruments as a part of your long term goal like retirement, marriage, child education should go for PPF for its stable and good returns along EEE taxation status.
  • For girl children SSA is the best debt instrument as gives slightly higher interest rate with EEE status.

Comments

Post a Comment