Are you looking for investment options that help you generate fixed income and diversify your portfolio? We have compiled a list of the best fixed-income options in India that not only promise great returns but also come with tax benefits. Check them out and make your pick!
Introducing Fixed Income Investments
Fixed income is an investment class that pays investors fixed interest or dividend payments until its maturity date. In addition to this, the principal amount is repaid at the time of maturity. Corporate and government bonds are the most commonly known types of fixed-income investments.
Companies and governments issue debt securities to raise money to fund critical business operations or to finance large projects. The investors lend their money against these securities in exchange for fixed and periodic interest payments. At the maturity date, investors are repaid the original amount they had invested known as the principal.
For example, if an investor buys a company-issued bond with a face value of ?1,000 that matures in five years. Over the course of five years, the company pays the coupon payments (interest) to the investor based on a rate of 10% per year. As a result, the investor is paid ?100 per year for five years. At the end of the five years, the investor is repaid the principal amount of ?1,000 on the maturity date. Investors can also find fixed-income investments that pay coupon payments monthly, quarterly, or semiannually.
Unlike equities that may pay out no cash flow or where the returns are not predictable or confirmed, fixed-income instruments usually have a predetermined return rate that is known to the investors at the time of investment.
Fixed-income securities are recommended for conservative investors seeking a diversified portfolio. The percentage of the portfolio dedicated to fixed income depends on the investor's investment style. There is also an opportunity to diversify the portfolio with a mix of fixed-income products and stocks creating a portfolio that might have 50% in fixed-income products and 50% in stocks.
Advantages of Fixed Income Investments
- Passive Income Generation: Fixed-income investments offer investors a steady stream of income over the life of the bond or debt instrument while simultaneously offering the issuer much-needed access to capital or money. Steady income lets investors plan for spending, a reason these are popular products in retirement and wealth creation portfolios.
- Low Volatility: The interest payments from fixed-income products can also help investors stabilise the risk-return in their investment portfolio. For investors holding stocks, prices can fluctuate resulting in large gains or losses. The steady and stable interest payments from fixed-income products can partly offset losses from the decline in stock prices. As a result, these safe investments help to diversify the risk of an investment portfolio.
- Collateral Backed: Most of the fixed income investments are backed by specifically designated collateral. Therefore, in the event of a default by the company, the collateral can be used to pay off the investors. Unlike in equities, where there is no assurance of capital gains or losses.
Best Fixed Income Options
- Corporate Bonds - When a company wants to raise money from investors for a fixed tenure at a predetermined interest rate, they do it through the corporate bond. A corporate bond's risk depends on the creditworthiness of the issuer. The Securities and Exchange Board of India (SEBI) regulates the issuance of Corporate Bonds. The terms and conditions applicable to the allotment will be mentioned in the prospectus prepared by the company. These instruments are traded on exchanges or over the counter (OTC).
- Fixed Deposits - These are one of the most secured forms of investment. Fixed deposits offer great flexibility with investment tenure. You can open short and long-term fixed deposit accounts. The amount is locked.
- Government Securities Bonds - These are issued by the central and state governments. The risk is less since the bonds are issued by the government. It can be issued by both Central and State governments of India.
- Public Provident Fund - PPF is a zero-risk fixed-income investment option that gives you higher returns than regular savings schemes. The invested amount is eligible for a tax deduction, and the accumulated amount and interest are also exempt from tax at the time of withdrawal.
- Asset Leasing - Leasing is an alternate investment option that has gained immense traction of late. It offers a host of benefits, including higher yields than fixed deposits, capital appreciation in the long term, and tax deductions. Leasing involves the renting of movable or immovable assets for a specified period. It is an agreement between a lender, the lessor, and a borrower, the lessee. The owner of the asset, typically an individual or a company, leases it to the borrower for a specific period and at a certain cost. The lessee is provided with exclusive use of the asset in exchange for periodic payments throughout the agreed-upon lease term.
Fixed-income investment options are ideal for you if you are looking for a safe investment option. If you are wary of stock market fluctuation and looking for a stable investment, consider investing in these plans. These investments are great at offering long-term stability to your savings. Explore ‘A’ rated bonds and lease-based investments on Grip.