Which fixed income instrument is the best? This is a question uppermost in the minds of the risk-averse investors. Over here we have attempted to help investors answer this question.

Fixed income instruments available in the market are the fixed deposits (FDs), government securities (gilts), life insurance (single premium bonds) and RBI Relief Bonds. We have tried to compare these instruments so as to ascertain the best option for the investor.

Fixed deposits
The most orthodox form of investment avenue in India is fixed deposits (bank and company). The interest rates on both have fallen steeply over the past few months. Bank deposits earn an interest of 8%-9% p.a. Company/NBFCs (non banking finance corporations) deposits offer interest rate depending on the credit rating of the company and the tenure of the deposit. Highest rated companies (AAA) offer rates of over 9.00% p.a. (HDFC Ltd. 9.15% p.a. for 5 years and Kotak Mahindra Finance 9.75% p.a. for 3 years deposit). However there are a few companies with moderate safety i.e. AA+ rated give interest rate higher than 10.00% p.a. e.g. Dewan Housing Finance.

However, these deposits become unattractive when tax is taken into consideration (highest bracket) as the actual return falls below 8% p.a.

Government securities (Gilts)
Gilts (or G-Secs) are fast becoming popular with the retail investors as the minimum investment in gilts can be as low as Rs 10,000. Below are the gilt papers of different maturities available for purchase in the gilt market.

Security	Yield (Annualized)	Price including Interest (Rs)	Maturity Date
11.10% CG 2003	4.7%	110.5	7-Apr-03
9.90% CG 2005	6.6%	111.9	22-Apr-05
14.00% CG 2005 (8/6)	6.9%	123.0	8-Jun-05
11.50% CG 2011	8.1%	128.9	5-Aug-11
11.03% CG 2012	8.1%	126.7	18-Jul-12
12.32% CG 2011	8.1%	133.4	29-Jan-11

Gilt prices have shot up in the past few months. However, these prices have come down in the past few weeks due to the OMO (open market operation) conducted by the RBI (Reserve Bank of India) and the advance tax payment due in the mid December. In the current market scenario it is not advisable to invest in gilts. The yield on gilts have fallen severely (as the price rises the yield on gilts fall) and the annualized yield on a 10 year gilt paper is as low as 8.05% p.a. e.g. 11.5% GOI 2011.

Also the income from gilts is taxable subject to Rs 3,000 benefit u/s 80L. If an investor invests in a 10 year gilt paper his actual return after tax will be lower than 7% p.a. assuming that he is in the highest tax bracket.

Insurance (Single Premium Bonds)
Bima Nivesh of LIC (Life Insurance Corporation) was one of the preferred fixed income options for investors as it offered an assured return of 9.15% p.a. for a 10-year policy. The actual yield was quite high as returns are tax-free and the investor also gets rebate u/s 88. However, these returns were financially unviable with interest rates having fallen considerably over the past 12 months and LIC has revamped Bima Nivesh considerably to bring its returns in line with other fixed income instruments.

RBI Relief Bonds
After considering other fixed income options, Relief bonds come out as the most attractive. Relief bonds give an assured return of 8.5% p.a. for five years and the interest income is tax-free. Also Relief bonds are of the highest safety as they are backed by the Government of India. If an investor has to make a long-term investment he can look at Relief bonds. Investors should reap these benefits at the earliest as the Y V Reddy committee has put forth a proposal before the government to benchmark these instruments against the gilts with the same maturity period. If the government accepts this recommendation Relief bonds returns will fall considerably, in line with gilt yields.

If you are in Mumbai and are interested in RBI Relief Bonds or other investment products, please register here.

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