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’.
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.
In this article we discuss the seven broad types of fixed income investment instruments which are popular in India.
The different fixed income investment options available 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.
1. Bank fixed deposits
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:
- Interest payout: Cumulative (the option which reinvests the interest) or non-cumulative (pays out interest at predefined intervals: monthly, quarterly, annually)
- Tax saving or regular: In a tax-saving FD, the amount gets locked-in and we cannot withdraw early
2. Recurring deposits (monthly investment instrument)
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.
3. The Public Provident Fund (PPF)
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.
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.
4. The National Savings Certificate (NSC)
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.
5. The Sukanya Samriddhi Yojana (investment instrument for girl children)
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.
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.
6. The Senior Citizen Saving Scheme
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.
7. The Post-Office National Monthly Income Scheme (monthly investment instrument)
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.
Choose the fixed income investment option best suited to your needs
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.
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.
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.