10 Fixed-Income Instruments in India for Investors

A stable financial future and wealth generation can be ensured by gaining a comprehensive knowledge of various investment tools and carefully evaluating them before making any investment choices. However, gaining knowledge of all available investment options can be difficult due to the wide range of financial instruments offered by financial institutions. Therefore, it is advisable for investors to focus primarily on investment alternatives that suit their investment goals and risk tolerance. Many individuals aim to achieve high returns that surpass inflation while minimising or avoiding risk altogether. Unfortunately, risk and returns go hand-in-hand, and it is not possible to earn significant returns without assuming considerable risk.

Several investors are averse to the risk of market volatility of equity and equity-related investment avenues. They prefer investing in financial instruments that offer stable and secure returns along with possible tax-saving benefits. Likewise, there are other investors who aim to diversify their investment portfolio by including various asset classes and seeking low-risk investment options to balance their overall portfolio. Such investors are often advised to invest in Fixed Income Securities. However, since there is a plethora of fixed-income products in the market, choosing the right ones can be a daunting task. This article elucidates the 10 Fixed Income Securities in India to help conservative investors understand different available options.

What are Fixed Income Securities?

Fixed Income Securities offer assured regular returns in the form of interest, which remains consistent regardless of market fluctuations. The ultimate value of the Fixed Income Security upon maturity is determined in advance and disclosed to the investor at the time of investment. This type of investment instrument is widely favoured by individuals who prefer to avoid or minimise risks and instead seek secure returns.

Are Fixed Income Securities completely risk-free?

No, while Fixed Income Securities offer assured returns and are considered low-risk compared to market-linked instruments, there could still be credit risk and interest rate risk associated with them.

1. Credit Risk:

Credit Risk in Fixed Income Securities refers to the potential for the issuer of a security to default on making timely interest payments or repaying the principal amount. It arises from the possibility that the issuer may face financial difficulties or become insolvent, leading to a higher likelihood of default. Investors are exposed to credit risk and may face the risk of not receiving the promised interest payments or even losing their principal investment if the issuer defaults.

2. Interest Rate Risk:

Interest Rate Risk refers to the fluctuations in interest rates that have an impact on bond prices, consequently influencing the returns of debt mutual funds. When interest rates increase, bond prices tend to decrease, and conversely, when interest rates decrease, bond prices typically rise.

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10 Fixed Income Securities in India for Risk-averse Investors

1. Fixed Deposits:

Bank Fixed Deposits are traditionally one of the most popular investment products in India, and they continue to hold an important place in investment portfolios, even amidst a variety of exotic investment products. Fixed Deposits are a secure investment option with very low risk to the investment as the interest rates do not fluctuate with market conditions. They come with flexible investment terms ranging from 7 days to 10 years, allowing investors to choose a term based on their financial goals. Fixed Deposits can offer stable returns even in uncertain market conditions, making them a great tool for portfolio management.

There are various types of Fixed Deposits to choose from based on the investor's needs; if an investor wants higher returns to create wealth and doesn't need regular interest pay-outs, he/she can consider Cumulative FDs, and if they want to save on taxes, a Tax Saver FD is probably a good option with tax exemption on the principal amount up to Rs 1.50 lakhs under Section 80C of the Income Tax Act, 1961.

In case of a financial emergency, an investor can withdraw their Fixed Deposit before maturity, but a penalty of 0.5% to 1% on the interest rate may be charged depending on the amount and bank, enabling quick access to funds. However, if an investor does not want to liquidate their FD, they can take advantage of the credit facilities like loans or overdrafts against Fixed Deposits which are offered at affordable interest rates.

2. RBI Floating Rate Bonds:

In July 2020, the Reserve Bank of India (RBI) introduced a floating-rate savings scheme with a maturity period of 7 years. The interest rate on these bonds is tied to the National Savings Certificate (NSC), offering a return rate of NSC + 0.35%. Currently, the interest rate is locked at 7.35% p.a. till June 2023. It is announced in advance every six months. The bonds do not have an upper cap on the investment but come with a lock-in period of 7 years. Investors can opt to invest in RBI Bonds through specific banks such as HDFC Bank and Axis Bank or brokerage platforms like ICICI Direct and HDFC Securities.

3. Public Provident Fund:

Since its inception, the Public Provident Fund (PPF) has emerged as a potent tool for long-term wealth creation among investors. Investors can build a substantial retirement corpus by consistently contributing to their PPF account over an extended period. The PPF has gained significant popularity, particularly among small savers, due to its appealing interest rates and tax benefits. One of the major advantages of PPF over other investment options is that it offers tax exemption under Section 80C of the Income Tax Act, and the returns from PPF are also tax-free. An investor can use the online PPF calculator to estimate the value of their PPF. Additionally, PPF account holders have the option to avail of a loan against their PPF balance, starting from the third year up to the sixth year of opening the account, at a nominal interest rate of 1% p.a.

4. Debt Mutual Funds:

Debt Mutual Funds invest the pooled funds in a diverse range of Fixed Income Securities, such as government bonds, corporate bonds, commercial papers, money market instruments, etc. Debt mutual funds offer higher returns compared to conventional options like bank fixed deposits and savings bank accounts.

Debt funds are particularly suitable for investors with low-risk appetites seeking regular income. Compared to equity funds, debt funds have lower volatility and are considered less risky. If an investor has been saving in traditional fixed-income products like bank fixed deposits and desires steady returns with minimal volatility, debt mutual funds can be a considerable option.

5. National Saving Certificate:

The National Savings Certificate (NSC) is a government-sponsored savings scheme that provides fixed-income returns. One can start investing in the NSC with a minimum amount of Rs 100, and there is no maximum limit for investment. The interest rates are determined by the government, considering factors such as inflation. The scheme offers two maturity periods, typically set at 5 and 10 years. Besides, the NSC can be utilised as collateral to secure a loan from various financial institutions.

6. National Pension Scheme:

The National Pension Scheme (NPS) is a retirement benefits program introduced by the Government of India. The scheme is designed to ensure a regular income for subscribers during their post-retirement years. Each subscriber is assigned a unique Permanent Retirement Account Number (PRAN) under the NPS. The scheme offers flexibility to investors to allocate their funds to equities and government securities based on their preferences. While there is no maximum limit on the investment amount in the NPS, only investments up to Rs 50,000 are eligible for tax deduction under Section 80CCD (1B) of the Income Tax Act. Apart from this, investments up to Rs 1,50,000 are eligible for tax deduction under Section 80C of the Income Tax Act.

7. Pradhan Mantri Vaya Vandana Yojana:

Prime Minister Vaya Vandana Yojana was implemented to offer regular monthly pensions to senior citizens, safeguarding their investments from declining interest rates. Individuals aged 60 and above are eligible to enrol in this scheme, which has a tenure of 10 years. After three years of investing, subscribers have the option to avail of a loan against their PMVVY investments. Take note that the pension limit in the scheme is determined based on the subscriber's family and their combined income.

8. Government Securities:

To begin with, know that government securities are not an investment scheme per se, but rather individuals have the option to invest in them according to their needs. Government securities, including bonds and treasury bills, have varying maturity periods ranging from 91 days to 40 years, depending on the type of securities. These securities have the potential to generate substantial income and can also be utilised as collateral to secure loans. However, it is crucial to thoroughly understand the terms and conditions of each security before investing, as the terms and conditions can differ among different securities.

9. Sovereign Gold Bonds:

Sovereign Gold Bonds (SGBs) are gold bonds issued by the Reserve Bank of India (RBI) on behalf of the Government of India. Essentially, SGBs are government securities that are denominated in grams of gold. The Indian government introduced the Sovereign Gold Bond (SGB) Scheme in November 2015 to provide investors with an alternative to holding physical gold. Investors are required to pay the issue price in cash, and the bonds will be redeemed in cash upon maturity.

In addition to the potential for price appreciation, SGBs offer a fixed interest rate of 2.5% per annum on the issue price. The interest is credited to the investor's registered bank account twice a year. This is a significant advantage over physical gold, as physical gold can only provide capital appreciation. Since SGBs are in a paper-based format, they eliminate the need for storage and mitigate associated risks and costs. SGBs are considered a liquid investment option, as premature redemption is permitted after the fifth year. Furthermore, in case of emergencies, investors have the option to sell the bonds or utilise them as collateral for a secured loan, with the same Loan to Value Ratio applicable to physical gold loans.

10. Senior Citizen Savings Scheme:

If an investor is seeking a government-supported savings plan for their post-retirement years, the Senior Citizen Savings Scheme (SCSS) is a worth considering option. This scheme was introduced with the aim of securing the future of senior citizens (individuals aged 60 and above). It offers a higher interest rate compared to other low-risk investment alternatives like bank fixed deposits and has a lock-in period of 5 years, with the option to extend it for an additional 3 years. Currently, the SCSS provides an interest rate of 8.2% p.a.

To conclude:

Because of the current market volatility, individuals are becoming more cautious about investing their money in high-risk options. Even experienced investors are shifting a major portion of their portfolio towards safer investment options. Hence, fixed-income investments have been preferred in 2023 by novice as well as seasoned investors and are expected to maintain their popularity going forward.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.