Fixed Income Investments in India

 

Fixed Income Investments in India

Fixed income investments are financial products that provide regular income payments and return the principal amount at maturity. They are generally considered lower risk compared to equities and can be an essential part of a balanced investment portfolio. In India, there are various fixed income investment options available, each with its own characteristics and benefits.

1. Fixed Deposits (FDs)

Fixed Deposits are popular fixed income investments offered by banks and financial institutions.

Features:

• Interest Rate: Fixed rate of interest, usually higher than savings accounts.
• Tenure: Ranges from a few months to several years.
• Safety: Generally considered safe, with principal and interest guaranteed by the bank.
• Taxation: Interest income is taxable, but there are tax-saving FDs with benefits under Section 80C of the Income Tax Act.

Example:

• HDFC Bank Fixed Deposit
• SBI Fixed Deposit

2. Public Provident Fund (PPF)

Public Provident Fund (PPF) is a long-term savings scheme backed by the Government of India.

Features:

• Interest Rate: Fixed by the government, often revised quarterly.
• Tenure: 15 years, with options to extend in blocks of 5 years.
• Safety: High safety due to government backing.
• Taxation: Contributions are tax-deductible under Section 80C, and interest earned is tax-free.

Example:

• PPF Accounts can be opened at any bank or post office.

3. National Pension System (NPS)

National Pension System (NPS) is a government-sponsored pension scheme designed for retirement savings.

Features:

• Interest Rate: Market-linked returns based on the performance of investments.
• Tenure: Long-term, until retirement age (60 years).
• Safety: Investments are managed by professional fund managers.
• Taxation: Tax benefits under Sections 80C and 80CCD(1B) of the Income Tax Act.

Example:

• NPS Accounts can be opened through authorized banks and financial institutions.

4. Government Bonds

Government Bonds are issued by the central or state governments to raise funds.

Features:

• Interest Rate: Fixed or floating, determined at issuance.
• Tenure: Varies from a few years to several decades.
• Safety: Very high, backed by the government.
• Taxation: Interest income is taxable, but some bonds have tax benefits.

Example:

• Government of India Savings Bonds
• State Development Loans (SDLs)

5. Corporate Bonds

Corporate Bonds are issued by companies to raise capital.

Features:

• Interest Rate: Higher than government bonds, varies based on credit rating.
• Tenure: Typically ranges from 1 to 10 years.
• Safety: Varies based on the issuing company's credit rating.
• Taxation: Interest income is taxable.

Example:

• Reliance Industries Bonds
• Tata Capital Bonds

6. Tax-Free Bonds

Tax-Free Bonds are issued by government-backed entities and offer tax-free interest income.

Features:

• Interest Rate: Generally lower than taxable bonds but offers tax-free returns.
• Tenure: Usually long-term.
• Safety: High, due to government backing.
• Taxation: Interest income is tax-free.

Example:

• Indian Railway Finance Corporation (IRFC) Bonds
• National Highways Authority of India (NHAI) Bonds

7. Senior Citizens Savings Scheme (SCSS)

Senior Citizens Savings Scheme (SCSS) is a government-backed savings scheme for senior citizens.

Features:

• Interest Rate: Higher than regular savings accounts and FDs.
• Tenure: 5 years, extendable by 3 years.
• Safety: Government-backed, making it highly safe.
• Taxation: Interest is taxable, but contributions qualify for tax benefits under Section 80C.

Example:

• SCSS Accounts can be opened at designated banks and post offices.

8. Fixed Maturity Plans (FMPs)

Fixed Maturity Plans (FMPs) are closed-end mutual funds with a fixed tenure.

Features:

• Interest Rate: Depends on the underlying securities.
• Tenure: Typically ranges from 1 to 5 years.
• Safety: Varies based on the fund’s investments.
• Taxation: Taxed as per the holding period; long-term capital gains may apply.

Example:

• HDFC FMP
• ICICI Prudential FMP

9. Post Office Savings Schemes

Post Office Savings Schemes offer various fixed income options with government backing.

Options Include:

• Post Office Monthly Income Scheme (POMIS): Provides a fixed monthly income for a tenure of 5 years.
• Post Office Time Deposit (POTD): Similar to bank FDs, with various tenure options from 1 year to 5 years.
• Post Office Recurring Deposit (PORD): Allows monthly deposits with interest paid at maturity.

Features:

• Interest Rate: Generally higher than savings accounts but varies by scheme.
• Safety: High, backed by the government.
• Taxation: Interest income is taxable.

10. Exchange-Traded Funds (ETFs)

Exchange-Traded Funds (ETFs) include fixed income ETFs that invest in bonds or other debt securities.

Types:

• Government Bond ETFs: Invest in government bonds.
• Corporate Bond ETFs: Invest in high-quality corporate bonds.
• Gilt ETFs: Invest in government securities with varying maturities.

Features:

• Interest Rate: Depends on the underlying bonds.
• Tenure: Varies based on the fund’s investment strategy.
• Liquidity: Traded on stock exchanges, offering liquidity and flexibility.
• Taxation: Taxed based on capital gains and holding period.

11. Fixed Income Mutual Funds

Fixed Income Mutual Funds invest primarily in debt instruments and offer a range of risk-return profiles.

Types:

• Short-Term Debt Funds: Invest in short-term debt securities with lower interest rate risk.
• Long-Term Debt Funds: Invest in long-term securities, potentially offering higher returns but with greater interest rate risk.
• Dynamic Bond Funds: Adjust the portfolio based on interest rate movements.

Features:

• Interest Rate: Varies based on the fund’s portfolio.
• Tenure: Open-ended, allowing investors to enter or exit at any time.
• Liquidity: Generally high, with the ability to buy or sell units on the market.
• Taxation: Taxed as per the capital gains rules; long-term capital gains may apply.

12. Sovereign Gold Bonds (SGBs)

Sovereign Gold Bonds (SGBs) are issued by the Government of India and provide returns linked to the price of gold.

Features:

• Interest Rate: Fixed annual interest, typically around 2.5% per annum.
• Tenure: 8 years, with an option to exit after the 5th year.
• Safety: Backed by the government.
• Taxation: Interest income is taxable, but capital gains on redemption are tax-free if held till maturity.

13. Infrastructure Bonds

Infrastructure Bonds are issued to fund infrastructure projects and often come with tax benefits.

Features:

• Interest Rate: Fixed or floating, typically higher than government bonds.
• Tenure: Generally long-term.
• Safety: Varies based on the issuing entity.
• Taxation: Tax benefits available under Section 80C of the Income Tax Act.

Example:

• IRFC Bonds
• NHAI Bonds

14. Rural Development Bonds

Rural Development Bonds are issued by entities involved in rural development projects.

Features:

• Interest Rate: Generally higher than other government bonds.
• Tenure: Long-term.
• Safety: High, due to government backing.
• Taxation: Interest income is taxable.

15. Non-Convertible Debentures (NCDs)

Non-Convertible Debentures (NCDs) are fixed-income instruments issued by companies that cannot be converted into equity.

Features:

• Interest Rate: Higher than FDs, varies based on credit rating.
• Tenure: Typically ranges from 1 to 5 years.
• Safety: Depends on the issuing company’s credit rating.
• Taxation: Interest income is taxable.

Example:

• HDFC NCDs
• ICICI NCDs

16. Fixed Income Annuities

Fixed Income Annuities provide regular income payments in exchange for an upfront lump sum investment.

Features:

• Interest Rate: Fixed, providing predictable income.
• Tenure: Lifelong or for a fixed period.
• Safety: Depends on the issuing insurance company.
• Taxation: Income from annuities is taxable.

Example:

• Life Insurance Corporation (LIC) Annuities
• HDFC Life Annuities

17. Corporate Fixed Deposits

Corporate Fixed Deposits are similar to bank FDs but are issued by corporations.

Features:

• Interest Rate: Generally higher than bank FDs, but varies based on the issuing company's credit rating.
• Tenure: Typically ranges from 1 to 5 years.
• Safety: Depends on the creditworthiness of the issuing company.
• Taxation: Interest income is taxable.

Example:

• Bajaj Finance Fixed Deposit
• Sundaram Finance Fixed Deposit

18. Asset-Backed Securities (ABS)

Asset-Backed Securities (ABS) are financial securities backed by a pool of assets such as loans or receivables.

Features:

• Interest Rate: Varies based on the underlying assets and credit risk.
• Tenure: Typically ranges from 2 to 5 years.
• Safety: Depends on the credit quality of the underlying assets.
• Taxation: Interest income is taxable.

Example:

• Muthoot Finance Asset-Backed Securities

19. Mortgage-Backed Securities (MBS)

Mortgage-Backed Securities (MBS) are fixed income investments backed by mortgage loans.

Features:

• Interest Rate: Generally higher due to the risk associated with mortgage loans.
• Tenure: Varies based on the underlying mortgages.
• Safety: Varies with the quality of the underlying mortgages.
• Taxation: Interest income is taxable.

Example:

• HDFC Mortgage-Backed Securities

20. Fixed Income ETFs

Fixed Income ETFs are exchange-traded funds that invest in fixed income securities.

Types:

• Government Bond ETFs: Invest in government securities.
• Corporate Bond ETFs: Invest in corporate bonds.
• Gilt ETFs: Invest in long-term government securities.

Features:

• Interest Rate: Varies based on the underlying bonds.
• Tenure: Varies based on the ETF’s investment strategy.
• Liquidity: High, as they are traded on stock exchanges.
• Taxation: Taxed based on capital gains and holding period.

Example:

• Nippon India ETF Nifty BeES
• ICICI Prudential Bharat Bond ETF

21. Hybrid Mutual Funds

Hybrid Mutual Funds invest in a mix of equity and fixed income securities.

Types:

• Balanced Funds: Maintain a balance between equity and debt.
• Conservative Hybrid Funds: Invest more in fixed income and less in equities.

Features:

• Interest Rate: Varies based on the fund’s allocation.
• Tenure: Open-ended, allowing entry and exit anytime.
• Liquidity: Generally high, with the ability to buy or sell units on the market.
• Taxation: Taxed as per capital gains rules; long-term capital gains may apply.

Example:

• HDFC Balanced Advantage Fund
• ICICI Prudential Conservative Hybrid Fund

22. Fixed Deposits with Non-Banking Financial Companies (NBFCs)

Fixed Deposits with NBFCs offer fixed returns similar to bank FDs but often with higher interest rates.

Features:

• Interest Rate: Typically higher than bank FDs.
• Tenure: Ranges from 1 to 5 years.
• Safety: Varies based on the NBFC’s credit rating.
• Taxation: Interest income is taxable.

Example:

• Bajaj Finance Fixed Deposit
• Muthoot Finance Fixed Deposit

23. Senior Citizens Savings Scheme (SCSS)

Senior Citizens Savings Scheme (SCSS) is a government-backed scheme offering higher interest rates for senior citizens.

Features:

• Interest Rate: Higher than regular savings accounts.
• Tenure: 5 years, extendable by 3 years.
• Safety: High, as it is government-backed.
• Taxation: Interest income is taxable, but contributions qualify for tax benefits under Section 80C.

Example:

• SCSS Accounts can be opened at designated banks and post offices.

24. Capital Protection Oriented Funds

Capital Protection Oriented Funds aim to protect the invested capital while providing fixed returns.

Features:

• Interest Rate: Depends on the fund’s investment strategy.
• Tenure: Usually medium to long-term.
• Safety: Focuses on capital protection, though returns may be lower.
• Taxation: Taxed as per capital gains rules; long-term capital gains may apply.

Example:

• HDFC Capital Protection Oriented Fund

25. Structured Products

Structured Products are customized investment products designed to meet specific investor needs.

Features:

• Interest Rate: Often linked to the performance of underlying assets.
• Tenure: Varies based on the product.
• Safety: Varies depending on the structure and underlying assets.
• Taxation: Depends on the nature of the returns.

Example:

• Structured Notes by Banks and Financial Institutions

26. Certificate of Deposit (CDs)

Certificate of Deposit (CDs) are time deposits offered by banks and financial institutions with a fixed maturity date.

Features:

• Interest Rate: Higher than savings accounts but varies based on the tenure and bank.
• Tenure: Ranges from a few months to several years.
• Safety: Generally safe if issued by a reputable institution.
• Taxation: Interest income is taxable.

Example:

• Certificates of Deposit by Major Banks

27. Reverse Mortgage

Reverse Mortgage allows senior citizens to convert home equity into regular income.

Features:

• Interest Rate: Fixed or variable, based on the lender’s terms.
• Tenure: Until the borrower’s death or sale of the property.
• Safety: Depends on the lender and terms.
• Taxation: Income from reverse mortgage is not taxable.

Example:

• Reverse Mortgage Schemes by Banks

28. Tax-Free Infrastructure Bonds

Tax-Free Infrastructure Bonds are issued by government-backed entities for infrastructure projects and offer tax-free interest.

Features:

• Interest Rate: Fixed, with tax-free returns.
• Tenure: Long-term.
• Safety: High, due to government backing.
• Taxation: Interest income is tax-free.

Example:

• IRFC Tax-Free Bonds
• NHAI Tax-Free Bonds

29. Tax-Saving Fixed Deposits

Tax-Saving Fixed Deposits are fixed deposits that offer tax benefits under Section 80C of the Income Tax Act.

Features:

• Interest Rate: Similar to regular fixed deposits but with added tax benefits.
• Tenure: 5 years.
• Safety: High, as they are offered by banks and financial institutions.
• Taxation: Contributions are tax-deductible up to ₹1.5 lakh per year under Section 80C, but interest income is taxable.

Example:

• State Bank of India (SBI) Tax-Saving Fixed Deposit
• HDFC Bank Tax-Saving FD

30. Fixed Income Securities

Fixed Income Securities are debt instruments that offer fixed periodic payments and are typically issued by governments or corporations.

Types:

• Treasury Bills (T-Bills): Short-term government securities with maturities ranging from 91 days to 364 days.
• Government Bonds: Long-term securities issued by the government with fixed interest rates.
• Commercial Paper: Short-term unsecured promissory notes issued by companies.

Features:

• Interest Rate: Fixed or floating, depending on the security.
• Tenure: Varies by security.
• Safety: Government securities are very safe; corporate securities vary based on the issuer.
• Taxation: Interest income is taxable.

Example:

• 91-Day T-Bills
• 10-Year Government Bonds

31. Fixed Maturity Plans (FMPs)

Fixed Maturity Plans (FMPs) are close-ended mutual funds that invest in fixed income securities with a fixed maturity date.

Features:

• Interest Rate: Varies based on the underlying securities.
• Tenure: Fixed maturity, typically ranging from 1 to 5 years.
• Liquidity: Limited, as they are closed-ended funds.
• Taxation: Taxed based on capital gains, with long-term capital gains applicable if held for more than 3 years.

Example:

• HDFC FMP
• ICICI Prudential FMP

32. Rural Infrastructure Development Fund (RIDF) Bonds

Rural Infrastructure Development Fund (RIDF) Bonds are issued by the National Bank for Agriculture and Rural Development (NABARD) to support rural infrastructure projects.

Features:

• Interest Rate: Fixed, generally higher than other government bonds.
• Tenure: Long-term.
• Safety: High, backed by NABARD.
• Taxation: Interest income is taxable.

33. Exchange-Traded Debt Securities

Exchange-Traded Debt Securities are fixed income securities traded on stock exchanges.

Types:

• Gilt ETFs: ETFs investing in government securities.
• Corporate Bond ETFs: ETFs investing in corporate bonds.

Features:

• Interest Rate: Depends on the underlying securities.
• Tenure: Varies.
• Liquidity: High, as they are traded on exchanges.
• Taxation: Taxed based on capital gains.

Example:

• Gilt ETF by SBI Mutual Fund
• Corporate Bond ETF by ICICI Prudential

34. Capital Protection Oriented Funds (CPFs)

Capital Protection Oriented Funds (CPFs) are mutual funds that aim to protect the capital invested while providing fixed income returns.

Features:

• Interest Rate: Varies based on the fund’s investments.
• Tenure: Typically 3 to 5 years.
• Safety: Focuses on capital protection, but not risk-free.
• Taxation: Taxed as per mutual fund capital gains rules.

Example:

• HDFC Capital Protection Oriented Fund
• ICICI Prudential Capital Protection Oriented Fund

35. Structured Products

Structured Products are pre-packaged investments that typically involve a combination of fixed income securities and derivatives.

Features:

• Interest Rate: Varies based on the structure and underlying assets.
• Tenure: Customizable, typically ranging from 1 to 5 years.
• Safety: Depends on the structure and issuer.
• Taxation: Varies based on the product’s structure.

Example:

• Structured Notes by Banks
• Custom Structured Products

36. Senior Citizen Savings Scheme (SCSS)

Senior Citizen Savings Scheme (SCSS) is a government-backed savings scheme specifically for senior citizens.

Features:

• Interest Rate: Higher than regular savings schemes.
• Tenure: 5 years, extendable by 3 years.
• Safety: Government-backed, ensuring high safety.
• Taxation: Interest is taxable, but contributions qualify for tax benefits under Section 80C.

Example:

• SCSS Accounts available at banks and post offices.

37. Monthly Income Plans (MIPs)

Monthly Income Plans (MIPs) are mutual funds designed to provide regular monthly income through dividends.

Features:

• Interest Rate: Varies based on the underlying investments.
• Tenure: Open-ended, allowing for flexible investment.
• Liquidity: High, as units can be bought or sold on the market.
• Taxation: Taxed based on capital gains.

Example:

• HDFC MIP
• ICICI Prudential MIP

38. Fixed Deposits by Non-Banking Financial Companies (NBFCs)

Fixed Deposits by NBFCs are similar to bank fixed deposits but offered by non-banking financial companies.

Features:

• Interest Rate: Often higher than bank FDs.
• Tenure: Ranges from 1 to 5 years.
• Safety: Varies based on the NBFC’s credit rating.
• Taxation: Interest income is taxable.

Example:

• Bajaj Finance FD
• Sundaram Finance FD

Conclusion

India offers a wide range of fixed income investment options, from traditional avenues like Fixed Deposits and Government Bonds to more complex options like Structured Products and Monthly Income Plans. Each option has unique characteristics in terms of safety, returns, tenure, and taxation. Evaluating these options based on your financial goals, risk tolerance, and investment horizon can help you build a diversified fixed income portfolio.