Fixed income instruments are financial instruments that offer assured returns along with capital protection. They are latent to market volatility and offer a fixed rate of interest throughout the investment period.
If you have a moderate or low-risk appetite, you can opt for a fixed income instrument to build your financial corpus for different life goals. Here are the various fixed income avenues that you can contemplate investing in and make a part of your portfolio.
A fixed deposit (FD) is a popular fixed income financial instrument in India. It’s a relatively simple product and one of the most common offerings from financial institutions such as banks, post offices, and non-banking financial companies (NBFCs). Here you deposit a lump sum on which you get a fixed rate of return throughout the investment period (tenure).
In an FD, you lend a certain sum of money to the financial institution upon which you earn interest. On opening an FD, you get a certificate of deposit that mentions the principal amount, rate of interest, investment tenure, and maturity amount. Upon maturity, you get the principal amount along with the interest earned.
There are two types of FDs on offer – regular and tax-saving.
FD is a relatively simple product. There are no complexities involved. You deposit lump sum money on which you earn interest. Also, the rate of interest, even if revised midway, remains the same. In other words, your FD will earn the same interest rate that prevailed at the time of booking even if the financial institution lowers it midway.
This loan facility is another major benefit of FDs. You can pledge your FD as collateral for obtaining a loan. Though the amount varies across lenders, generally, you can avail 80% to 90% of the FD amount as a loan. So, in case you require money for any purpose, you can pledge your FD as security and obtain the desired loan.
As said, the tenure of a regular FD ranges from a week to up to 10 years. You can select the investment tenure as per your requirement.
An FD is an ideal avenue to park money for emergencies. As you can access it easily in times of need, it’s a good option to save up for a contingency. You can deposit money equivalent to six months or a year’s expense in a regular FD.
Public Provident Fund or PPF is another popular fixed return instrument that you can invest in to build a corpus for goals such as children’s higher education, marriage, and retirement. A Government of India (GoI) backed scheme, PPF has a lock-in period of 15 years.
It means you can withdraw the entire amount only after the completion of 15 years, though partial withdrawals are permitted subject to certain conditions. Also, note that if you wish, you can extend the period by five years more after the completion of 15 years.
You can open a PPF account in any bank or post office. You can complete the process online or offline. All you need to do is to fill up the required form and produce these documents:
You can invest a minimum of INR 500 and a maximum of INR 1.5 lakh in a fiscal in your PPF account. While earlier only 12 deposits were allowed in a financial year, recent changes in PPF rules have removed this cap. Today, you can make an unlimited number of deposits towards your PPF account.
PPF enjoys an exempt, exempt, exempt (EEE) status. It means that the amount invested, interest earned, and maturity amount are entirely tax-free. You don’t need to pay any taxes on them. Thus, investing in PPF helps you lower your tax liability.
Many subscribers often complain about the long lock-in period of PPF. However, it’s this lock-in that gives more time to your money to grow and brings the power of compounding into play. Compounding ensures you earn interest on the interest amount, and this helps you build a sizeable corpus.
Among several fixed return instruments, PPF enjoys a decent interest rate. The Government decides the rate of interest every quarter, and as of now, it’s 7.1% annually. Though PPF interest rates have come down over the years, the prevailing interest rate is higher than most others.
If you require any short-term loan, you can bank on your PPF account. You can obtain a short-term loan at an interest rate of 1% on your PPF account. Earlier, this rate was 2%. You can procure the loan from the third financial year till the end of the sixth financial year of operations of your account.
National Savings Certificate, or NSC as it is commonly known, is another fixed income option that you can look forward to investing in if you want assured income. You can buy NSCs from your nearest post office.
NSC not only provides you with guaranteed returns but also helps in bringing down your tax liability as investments qualify for exemption under Section 80C of the Income Tax Act, 1961. It has a maturity period of five years.
Investing in NSC is simple and easy. To do so:
This is a major advantage of NSC investment. You can invest in NSC from as little as INR 100. To put it otherwise, you don’t need a large sum of money to kick-start your NSC investment.
If you require a loan at any phase of your life, you can pledge your NSCs as collateral for obtaining the same. All financial institutions and lenders accept them as security.
Investment in NSC is risk-free as the Government of India backs it. Also, it’s an ideal investment avenue for small savings that you can utilize to address goals such as building a corpus for a vacation or making down payment for your home or car.
Each of the fixed return instruments offer guaranteed returns and are shock-proof against market volatility. Having them in your portfolio provides stability during market downturns and preserves your overall gains.
Source: Forbes Advisor