In the current scenario of falling interest rates and increasing volatility in the debt markets, it has become very difficult for the investor to select the right fixed income instrument. It has become necessary for the investor to know his objective before investing in any fixed income instrument.

Below we have attempted to classify investment instruments depending on the differing objectives of investors. The most important points an investor must take into consideration before setting his objectives is his risk appetite, returns expectations, investment horizon and liquidity.

Instruments	Risk	Return	Investment Horizon	Liquidity
Bank Deposits	Low	Low	30 - 365 days	Moderate
Company Deposits	Low to High	Low-High	1 - 3 years	Low
RBI Bonds	Low	Moderate	5 years	Low
Government Securities	Low	Moderate	Above 1 year	Moderate
Liquid funds	Low	Low	1 - 3 months	High
Income funds	Moderate	Moderate	6 months - 1 year	High
Gilt funds	Moderate	Moderate	1 year	High
Equity funds	High	High	1-3 years	High

Low risk, Low returns (Short investment horizon)
With this investment objective the investor has the option of short-term Bank deposits for 1-6 months where he could expect returns of 6%-8% p.a. depending on the tenure. The other option for him is Liquid funds, which could give him returns of over 8% p.a. along with very high liquidity and tax benefits (as income is usually paid out in the form of tax free dividends).

Low risk, Moderate returns (Investment horizon of at least 1 year)
An investor with this objective can invest in Company/NBFC deposits, which are ‘AAA’ rated. This will fetch him returns of around 8-9% p.a. with moderate liquidity e.g. HDFC Ltd. Kotak Mahindra Ltd. and ICICI Home Finance. However, after factoring in tax implications, the actual return on these deposits comes down to less than 8% p.a.

The other option is government securities i.e. gilts give returns of over 7-8% p.a. along with high safety and liquidity. However these have limited tax benefits, as the interest is taxable subject to Rs 3,000 tax benefit u/s 80L.

The most competitive investment option is the Liquid funds, even though they give lower returns. However, when tax and liquidity is taken into consideration, they fair better than both deposits and gilts.

The other option is Relief Bonds, which gives 8.0% p.a. tax-free returns with maximum safety (it is backed by the Government of India). However the liquidity is very low as the investment is locked for 5 years.

Moderate risk, Moderate Returns (Investment horizon of 1 year)
An investor with this objective can opt for Company deposits with moderate safety i.e. ‘AA’ rated that will fetch him over 10% p.a. returns e.g. Dewan Housing. However these investments are not liquid.

The other option is the Income and gilt funds, wherein an investor can expect returns of approximately 9% p.a. and are also tax effecient. Both income and gilt funds have very high liquidity. However these funds can be very volatile in short term.

High risk, High returns (Long term investment)
Growth (equity) and Index funds are the best options for investors with a high-risk appetite along with a long-term investment horizon. Equity funds, over the long term, have generated returns, which have been higher than competing instruments.

Before you actually make a call on where to put your money, it is imperative that you define your objectives in terms of risk appetite, tenure and expected returns. A good investment plan would tend to be diversified in all these aspects.

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