Saving Avenues: Fixed Income Investment Options

Female hand putting coin into piggy bank closeup

Perhaps one of the biggest nightmares of an adult is the inability to pay their bills or fulfil their basic financial responsibilities towards those who depend on them. After all, human beings work hard to earn a living in order to live stable and comfortable lives.

Financial stability is the key to fulfilling our responsibilities while enjoying a stress-free life.

We often confuse financial prosperity and financial stability. We need to understand that being stable is the foundation of being prosperous.

Taking on too much risk for early prosperity, can sometimes lead to a difficult life with huge losses or debts. It is in order to create financial stability that Indians give considerable importance to fixed income investment options.

The idea behind fixed income investments is not focused only on returns. They are essential to manage the risk component in our portfolios. Fixed income investments are also termed ‘debt investments’.

Small modern safe on shelf to indicate how fixed income investment options are safe havens
Small modern safe on shelf to indicate how fixed income investment options are safe havens
Fixed income investment options are the safe lockers which keep our earnings secure and help us to earn some returns on them too

One of the most powerful features of fixed income investments is that they allow us to take advantage of compound interest over time.

As explained in our previous article, compounding provides the fuel to grow further and beyond by leveraging not only the principal we invested in the beginning, but also the interest that is generated from that principal.

Concept of power of compounding where the principal earns interest and gets added back to the principal.
Concept of power of compounding where the principal earns interest and gets added back to the principal.
Albert Einstein rightly called the principle of compounding the eighth wonder of the world

In this article we discuss the seven broad types of fixed income investment instruments which are popular in India.

There is a variety of fixed income investment options that people can choose from in India. It is important to understand the key features of each before choosing any.

Fixed deposits are investment instruments that promise the investor a fixed rate of compound interest on the principal amount. The returns on a fixed deposit are higher than what we would expect from a regular savings deposit. They have a fixed holding tenure before it matures and pays out the principal and the interest accumulated over the deposit tenure.

It’s important to remember that we cannot withdraw the principal and interest amounts before maturity without some penalties.

However, there are some schemes offered by banks which allow the pre-mature withdrawal or partial withdrawal of funds at minimal cost. An interesting point to note is that as of January 2021 the government insures bank deposits up to ₹5 lakh.

There are different kinds of of fixed deposit options. Here are some of their key features:

  1. Interest payout: Cumulative (the option which reinvests the interest) or non-cumulative (pays out interest at predefined intervals: monthly, quarterly, annually)
  2. Tax saving or regular: In a tax-saving FD, the amount gets locked-in and we cannot withdraw early
Jar with a label that says 'Fixed Deposit' with a clock to indicate the term. Fixed deposit is one type of fixed income investment option.
Jar with a label that says 'Fixed Deposit' with a clock to indicate the term. Fixed deposit is one type of fixed income investment option.
Bank fixed deposits are best for people who can put aside a stipulated amount for a fixed period which can be long term or short term

The Recurring Deposit or RD is a special type of term deposit which helps people with regular incomes to deposit a fixed amount every month into their RD accounts and earn interest on the same. We can start with an amount as small as ₹100 per month.

It is the best option for people who earn stable monthly incomes and want to set aside a small amount every month.

However, partial or mid-term withdrawals are not available under this option. We can opt for premature withdrawals, but one has to incur some charges or lose interest in such cases.

The PPF is one of the safest fixed income investment options. The government provides complete security for it and it is not affected by any type of market risk. (Learn more about the PPF in our article.)

The Public Provident Fund currently has a lock-in period of 15 years. This period is further extendable by 5 years. We can invest a minimum of ₹500 and maximum of ₹1.5 lakh annually.

Public provident fund or PPF, a low risk Indian investment choice, tax exempt concept highlighted through Indian rupees and coins in a steel utensil, a calculator, and pen.
Public provident fund or PPF, a low risk Indian investment choice, tax exempt concept highlighted through Indian rupees and coins in a steel utensil, a calculator, and pen.

The contribution to PPF is also eligible for deduction under section 80c of the Income Tax Act. Further, the total interest accrued on PPF investments is exempt from tax. Therefore, the PPF holds huge importance for the middle-class Indian owing to its tax benefits and security features.

The National Savings Certificate or NSC is one of the post-office saving schemes which offers guaranteed returns with low risk. NSCs offer a fixed interest rate compounded annually with a maturity period of 5 years . The principal money invested in NSC is tax free as NSCs are a form of government-backed tax saving scheme.

The Sukanya Samriddhi Yojana is a small-deposit investment scheme

An account can be opened for a girl child up to 10 years of age. It allows one to make deposits for up to 15 years from date of account opening.

A little girl smiles as does her homework in the study room. The image indicate the investment option available for girl children.
A little girl smiles as does her homework in the study room. The image indicate the investment option available for girl children.

Under this scheme, partial withdrawals are allowed once the girl child reaches 18 years of age. The account can be closed only after the girl child becomes 21 years old.

This scheme has become widely popular due to its tax benefits. One can avail tax deductions amounting to ₹1,50,000 under section 80C of the IT act.

The Senior Citizen Saving Scheme is an investment instrument for citizens aged over 60 years. This is a one-time deposit scheme that cannot exceed ₹15 lakh.

The deposit matures after 5 years from the date of opening. It can be extended once over 3 years. Only Indian residents are eligible to apply for this scheme.

The Post-Office Monthly Income Scheme is one of the flagship schemes which generally pays high tax-free interest.

The interest is credited to the depositor’s account every month. It is highly suitable for people who want a regular monthly income on their deposits. It has a huge advantage over the traditional FD under which the interest amount gets locked for a stipulated period.

The lock in period for the scheme is minimum 5 years. You cant make any withdrawal before 5 years. The maximum investment limit is ₹4.5 lakh. The maximum limit for a minor’s account is ₹3 lakh.

There are a plethora of fixed income investment options available in the market. We can choose any one or two on the basis of our needs and features of the scheme.

Bag of Indian money with Indian rupee sign in green background. The image indicates investment in fixed income investment options.
Bag of Indian money with Indian rupee sign in green background. The image indicates investment in fixed income investment options.
It is also always important to pay attention to the taxation benefits, rate of return, and lock-in period while making a choice of fixed deposit options

We should always remember that fixed income investment options are like the spinal cord in the body. These investments help us stand erect and strong during both good and bad times.

It’s a good idea to consider them in one’s portfolio, as one really can’t survive without a strong foundation that can be used as an emergency fund in times of need.

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Disclaimer: This article is for educational purposes only. It should not be considered financial or legal advice. Please consult a financial professional before making any significant financial decisions.

Lokyatha is an education focused initiative to enable young adults to live better, more fruitful lives by delivering real world life skills.

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