The same goes for fixed-income investments in your portfolio. They provide your portfolio with a solid foundation in the form of stability, liquidity, and downside protection. This is why they deserve equal importance in your portfolio as high return options like equity.
The number of fixed income investment options available today may make it difficult for young investors to choose the right one for their financial needs. In this article, we explain the main features of some popular options. This hopefully will help you zero in on the right option for your needs.
1. Debt Mutual Funds:
Given the financial industry’s innovation over the years, debt mutual funds have emerged as a perfect fixed-income investment option for young investors. They are low cost, transparent, and easy to invest. They invest in fixed-income securities like treasury bills, corporate bonds, etc. Investing in debt funds come with the following benefits:
- Unlike investments like corporate FDs, in debt funds, your money is diversified across multiple papers and bonds – this reduces the credit risk in a big way.
- You get the option to choose a fund whose duration aligns with the maturity date of your financial goal.
- Unlike age-old investments like post office schemes, here you get super-flexible options to invest like SIP, STP and SWP. Also, you can invest utterly online from the comfort of your home, which saves time and effort.
- Debt funds allow you to do some intelligent planning and reduce your tax impact. This is because debt funds get taxed as capital gains. The liability to pay tax arises only at the time of selling the investment.
2. Fixed Deposits:
3. Public Provident Fund:
4. Employee Provident Fund:
5. Sukanya Samriddhi Yojana:
6. Post Office Schemes:
There are also many Post Office saving schemes that you can choose from. Features of some notable schemes are as follows:
- National Savings Certificates (NSC): You can invest in it without a limit. Investment up to INR 1.5 lacs carry a tax deduction under Section 80C. The interest rate varies every year (the present rate is 6.8%), and interest is taxable every year.
- Post Office Monthly Income Scheme (MIS): You can invest up to INR 4.5 lacs in a single name and INR 9 lacs in a joint name. The interest rate varies every year (the present rate is 6.6%) earned is taxable. Unlike NSC, you don’t get a tax deduction for your investment.
Some Points to keep in mind while making fixed-income investments
- Investment in fixed income avenues doesn’t protect you from inflation. Don’t invest all your money in these avenues. Decide on an asset allocation and invest in a balanced mix of low and high-risk investments.
- Align the maturity date of investment with the financial goal. Check the lock-in period and pre-mature withdrawal penalties before investing.
- Take care to manage the credit risk and duration risk in debt funds. You can minimise duration risk by choosing liquid and short-term funds. Choosing funds having a highly rated and diversified portfolio helps manage credit risk.