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Fixed Income Products

Fixed income broadly refers to those types of investment security that pay investors fixed interest or dividend payments until their maturity date. At maturity, investors are repaid the principal amount they had invested. Fixed income is an investment approach focused on the preservation of capital and income. Fixed income can offer a steady stream of income with less risk than stocks. It typically includes investments like government and corporate bonds, CDs and money market funds. The amount of the payout could vary though. One of the most common forms of this kind of investment is individual bonds.

Why Fixed Income is required in your Portfolio?

  • Diversification from stock market risk: Fixed income is broadly understood to carry lower risk than stocks. This is because fixed income assets are generally less sensitive to macroeconomic risks, such as economic downturns and geopolitical events.
Fixed income investments
  • Capital preservation: Capital preservation means protecting the absolute value of your investment via assets that have a stated objective of return of principal. Investors who are closer to retirement may rely on their investments to provide income. Because fixed income typically carries less risk, these assets can be a good choice for investors who have less time to recoup losses. However, you should be mindful of inflation risk, which can cause your investments to lose value over time.
  • Income generation: Fixed income investments can help you generate a steady source of income. Investors receive a fixed amount of income at regular intervals in the form of coupon payments on their bond holdings. In the case of many, municipal bonds, the income is exempt from taxes.
  • Total return: Some fixed-income assets offer the potential to generate attractive returns. Investors can seek higher returns by assuming more credit risk or interest rate risk.

Types of Fixed Income options:

  • Public Provident Fund: This is one of the more popular schemes for long term investment that is backed by the Government of India. It has attractive interest rates that are also fully tax exempt. The investment duration is for 15 years with the option to extend the same in blocks of five years. There is taxation benefit under Section 80C of the Income Tax Act where interest is tax free. The maximum investment amount in a year is INR 1.5 lakh.
  • Voluntary Provident Fund: Another fixed-income investment option is the Voluntary Provident Fund which is but the contribution towards the provident fund account by the employee. This is a good option for risk averse investors to accumulate long term wealth.
  • Listed PSU Bonds: These are bonds that are issued Government backed entities and have very low risk of defaulting. The income generated by means of interest on these bonds is completely exempt from Income Tax. The capital gains, in case of any, are, however, taxable.
  • Senior Citizen Savings Scheme: This is a good bet for investors over the age of 60, low tax bracket, and seek a regular stream of income. The time frame for this investment is 5 years which can be further extended by another 3 years. A maximum of INR 15 lakh is allowed as investment.
  • Pradhan Mantri Vaya Vandana Yojana (PMVVY): The PMVVY, implemented through the Life Insurance Corporation of India (LIC) is an avenue to provide social security to the elderly aged 60 and over, from future fall in their interest income caused by adverse economic conditions. The investment limit for the same was extended from the earlier INR 7.5 lakh to INR 15 lakh this year. The good thing about this plan is that it offers assured pension based on the rate of return which is guaranteed at 8 percent per annum for 10 years.
  • Sukanya Samriddhi Yojana (SSY): The Sukanya Samriddhi Yojana is a small deposit scheme that was launched as part of the campaign “Beti Bachao Beti Padhao” and is meant for the girl child. It currently offers an interest rate of 8.1 percent with income tax benefits. The scheme can be availed for your daughter anytime from her birth till the time she turns 10. The minimum deposit amount for the scheme is INR 1000, with the upper limit set at INT 1.5 lakhs during the ongoing financial year. The account can remain operative for 21 years from the date of opening or till the time of your daughter’s marriage post 18 years.
  • Company Fixed Deposits (CFD): A Corporate Fixed Deposit is a term deposit kept for a set period of time at a set rate of interest. For many companies corporate fixed deposit are an excellent means to raise capital from the general public. Financial and non-financial institutions offer company fixed deposits. A variety of credit rating agencies like ICRA, CARE, CRISIL and other such agencies frequently grade these term deposits of their credibility. Corporate Fixed Deposit offer higher interest rates than bank fixed deposits.
  • Tax Saving Bonds: Tax free bonds are financial securities issued by the government of India. They are of low risk and provide a fixed interest rate. As the name suggests, the most attractive feature is absolute tax exemption as per Section 10 of the Income Tax Act of India, 1961. Tax free bonds have a long-term investment horizon of 10 years or more. The most common example of a tax-free bond is that of municipal bonds.