Fixed income instruments that guarantee capital and returns
A wise wisdom says, “The art is not in making money, but in keeping it”. So when the equity markets are in a state of turmoil, traditional fixed income instruments are back in favour as they guarantee both the capital and returns. Apart from bank deposits, there are a whole gamut of other investment instruments having the similar features.
Term Deposit
Also called fixed deposits, it is one of the most favourite instruments among conservative investors and savers. Under this scheme, investors need to deposit a lump sum amount for a fixed period at a predetermined rate. Other than banks, post offices (PO) and corporates also offer term-deposit schemes. However, they differ in terms of interest rates, minimum investment, tenure and tax treatment of the interest income.
Bank FD: Bank deposits have an edge over others. The tenure for term deposit offered by banks varies from 15 days to 10 years. It is also liquid asset next to demand deposits. Though the announcement of tax exemption for bank FDs for a period of 5 years and above had attracted investors, this year they are switching to other schemes as the rates offered banks were very low — in the range of 6-7.75% p. a. for the deposit with the maturity period of 3-5 years and above.
Post Office Deposit: With moderation in bank deposit rates, PO term deposits are now very competitive. PO allow to open term deposit only for the period of 1, 2, 3 and 5 years offering interest rate in the range of 6.25-7.50%. An added advantage is the investment under this scheme for 1-3 years is also liable for tax exemption under Section 80C. However, though the interest income is taxable, there is no TDS deduction.
Corporate FDs: In recent times, a few domestic companies have opted to raise money through this route. These schemes look attractive as most companies offer higher interest rates than bank FDs for the same maturity period. However, the investor needs to be careful before choosing the company to park their money with. It is because while banks deposits of up to Rs 1 lakh are insured, no such protection is available in the case of company FD. Given this, its best to stick with corporates FDs with AAA/AA ratings or those that have a history of strong financials and belong to large and reputed business houses.
Monthly Income Scheme
Similarly to term deposits, Post Offices offer Monthly Income Scheme (MIS), which is designed to provide a monthly income for investors. Individuals can open the account; either single or in joint name with any post office in India at the simple rate of interest 8% p.a that will be paid out to the investor each month. If such monthly payout is not needed, one can invest the monthly interest receipts in Post Office’s Recurring Deposit (RD) scheme. This combination will fetch almost a yield of 10.5%. An added advantage to the investors of MIS is a bonus payout of 5% on the initial amount of investment. However, this scheme does not enjoy any tax benefit, which makes it unpopular amongst investors.
National Saving Certificate
Looking for a fixed income instrument for tax saving, then the best option is Post Office’s NSC. It combines adequate returns with high safety. They are issued in various denominations starting from Rs 100 for fixed maturity period of 6 years at the rate of 8% compounded half yearly. The amount parked under NSC enjoys tax benefit under Section 80C, and the premature withdrawal is not allowed.
Kisan Vikas Patra
It is the only fixed income instrument that guarantees to double the investment over a period of 8 years and 7 months. KVP’s are issued in various denominations for a maturity period, which is fixed. Encashment of KVP before maturity is possible after two-and-a-half years. However, one may forgo some interest income. Kisan Vikas Patra could be a better option when there is low interest rate as it offers high returns with liquidity. The only drawback of this instrument is that it does not qualify for tax exemption u/s 80C and the interest income is taxable.
Public Provident Fund
This is an investment-cum-tax saving instrument. It also serves as a retirement planning tool for many. The rate of interest offered is fixed at 8% compounded annually. One can open a PPF account with some of the major branches of State Bank of India and any of post office in the country. The amount parked under the scheme enjoys tax exemption under Sec 80C. Unlike other schemes, the interest earned under PPF is tax free. However, it is for longer tenure like 15 years and one needs to invest at least Rs 500 every year without a fail to continue with the same account.
These instruments have zero risk if one has lump sum amount to invest. There are other instruments like bonds offered by development finance institutions or infrastructure companies. Other instruments such as non-convertible debentures and debt-market mutual funds can also be broadly categorised as fixed income instruments but they are subject to interest rate risk. In short, amidst uncertainty prevailing in the equity market, one can use these instruments to de-risk their investment portfolio.
Source: Economic Times
