There are different types of people in the world. Some prefer a safe and stable lifestyle, while some others love living on the edge. These two ideologies can be best seen in investing. On the one hand, you have products that offer assured returns with capital protection. On the other, you have those that offer prospects of capital appreciation but with risks. In this article, let’s talk about the first category in the world of investing – the different types of fixed-income instruments.
Fixed Deposits (FDs)
FDs are one of the most popular instruments in India. They are simple to understand and require little to no market understanding. FDs offer a maturity term that ranges from seven days to 20 years. Your money grows at a fixed rate of interest. At maturity, the principal and interest are paid to you. Banks, post offices, and Non-Banking Financial Companies (NBFCs) offer FDs. Moreover, there are different types of FDs like corporate deposits, senior citizen deposits, tax-saving deposits, etc.
Debt mutual funds
If you want to invest in mutual funds with low risk, debt funds can be a suitable choice. Debt mutual funds invest in fixed-income securities like government and corporate bonds, government securities, treasury bills, etc. Debt funds are relatively less volatile and offer higher liquidity than equity funds. You can choose them to maintain stability in your portfolio. The Security and Exchange Board of India (SEBI) categorises debt funds into 16 types, including liquid funds, money market funds, ultra-short duration funds, etc.
Public Provident Fund (PPF)
PPF is a government-backed savings instrument that allows you to prepare for long-term goals like retirement, a child’s education, a down payment for a home, etc. It has a lock-in period of 15 years. A PPF account can be opened with a bank or the post office. Moreover, you can invest between Rs 500 to Rs 1.5 lakh per annum in instalments or a lump sum.
National Savings Certificate (NSC)
NSC is a post office savings scheme. Like PPF, NSC is also a Government of India-backed product. It contains low risk and offers assured returns. You can invest a minimum of Rs 1,000 in a year with no limit on the maximum investment. NSC has a lock-in period of five years.
Bonds
Bonds are high-security debt instruments that allow you to lend money to governments, private organisations, municipalities, etc. Companies or governments need money from time to time to fund their operations. So, they issue bonds. When you invest in them, you lend money to these organisations. In return, you get paid regular interest. There are different types of bonds, such as corporate, government and municipal bonds.
Now that you know the basics, let’s compare these instruments.
| FDs | Debt mutual funds
| Bonds
| PPF | NSC |
Liquidity | Partial withdrawals are allowed before maturity, but they may incur penalties | There is no lock-in period for open-ended debt funds, and you can redeem your money anytime | You may incur penalties and fees for withdrawals before maturity | Withdrawals before the lock-in period are capped at 50% of the balance and permitted only after six years under exceptional circumstances | Early withdrawals before the lock-in period are permitted under special circumstances |
Tax benefits | Tax deductions only on contributions to five-year FDs (tax-saving FDs) of up to Rs 1.5 lakh per annum under Section 80C | Indexation benefits are available in the case of long-term capital gains.
This means your cost of investment is adjusted for inflation while calculating your tax liability. | Tax-free bonds like municipal and infrastructure bonds offer tax exemption on the interest earned under Section 10 | Tax deductions on contributions of up to Rs 1.5 lakh per annum under Section 80C | Tax deductions on contributions of up to Rs 1.5 lakh per annum under Section 80C |
Loan facility | Can be used as collateral | Can be used as collateral | Can be used as collateral | Loans against the account are permitted between the third and the sixth financial year | Can be used as collateral |
Now that you know the different types of fixed-income instruments, make sure to choose them carefully after assessing your needs.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
