Fixed income investments provide stable returns with relatively lower risk compared to equity investments. In India, the main fixed income options available are bonds, fixed deposits (FDs), and debt mutual funds. Read on to understand the key features and suitability of each option.
Bonds
Bonds are debt instruments issued by companies or government bodies to borrow money for a specified period. The issuer promises to pay a fixed rate of interest and return the principal amount at maturity. There are various types of bonds available in India – government bonds, corporate bonds, municipal bonds, etc. Government bonds like government securities and treasury bills are considered the lowest risk. Bond prices fluctuate according to market conditions. When interest rates rise, bond prices fall and vice versa. Investors looking to exit before maturity may gain or lose depending on prevailing rates.
Minimum investment amount can start from Rs. 10,000-20,000 depending on the issuer. Interest rates are usually higher than bank fixed deposits. Bonds need to be held till maturity to earn the full interest and get back the principal. Liquidity is low compared to other options. Bonds are best suited for investors with a higher risk appetite and ability to hold till maturity for stable and assured returns. Regular income investors may prefer other options.
Fixed Deposits
FDs are time-bound savings schemes offered by banks, small finance banks and non-banking financial companies (NBFCs). Interest is paid at pre-determined fixed rates without any fluctuations. FDs are considered very safe with sovereign guarantee of up to Rs. 5 lakh per bank. Minimum investment starts from Rs. 1000. Interest rates offered are comparable to short-term debt instruments. Liquidity is an issue as premature withdrawals usually attract a penalty unless specified otherwise. Interest rates on premature withdrawal are also lower.
FDs are suitable for conservative investors looking for complete capital safety along with assured returns for short-term financial goals up to 3-5 years.
Debt mutual funds
Debt mutual funds invest in a portfolio of fixed income securities like bonds, debentures, government securities and money market instruments. They offer better post-tax returns than bank FDs for those in higher tax brackets. Returns are dependent on the performance of the underlying portfolio. Various debt fund categories exist with different maturity profiles – liquid funds, ultra-short duration funds, short duration funds, etc. Options for all risk profiles. Minimum investment amount starts from Rs. 500-1000 only. Daily/weekly liquidity available unlike bank deposits.
Flexibility to switch between debt categories or exit according to changing interest rate views. Professional fund management. Suitable for investors with an ability to take slightly higher risks than FDs for potentially higher post-tax returns over medium to long term (3-10 years).
Suitability Analysis
- Bonds are best for investors who are fine taking higher price volatility risk for higher pre-tax returns. FDs suit conservative investors focused on capital safety over returns.
- Debt funds balance risks and returns better than individual options. Short term investors up to 3 years can consider liquid/ultra short term funds over FDs for higher post-tax returns.
- Those above 3 years can invest in short/medium duration funds depending on risk profile and capital needs. Senior citizens can diversify a portion of their savings into debt funds as well.
- Systematic investment plans or SIPs in debt funds allow rupee cost averaging to tide over interest rate fluctuation risks. Overall, fixed income allocation in the portfolio provides stability while participation in equity returns.
Evaluating individual needs on parameters like investment horizon, risk appetite and tax bracket helps identify the optimal fixed income investment avenue in India. A combination approach diversifies risks further. Regular reviews are advisable in a dynamic interest rate environment.
This covers the key aspects of bonds, fixed deposits and debt mutual funds for fixed income investing in India. Proper analysis and periodic monitoring allow maximizing risk-adjusted returns from the suitable options.
