7 Different Types of Fixed Income Investment Instruments in India

Fixed Income Investment Instruments in India

If you’re looking for a steady stream of income with lower risk than stocks, fixed income investment might be the right choice for you. Fixed income investments focus on capital preservation while offering predictable returns, making them a popular choice among conservative investors. In this blog, we’ll explore the different types of fixed income investment instruments available in India and how they can help you achieve your financial goals.

1. Public Provident Fund (PPF)

PPF is a long-term investment scheme backed by the Government of India, making it one of the safest fixed income investments.

• Tenure: 15 years (with partial withdrawals allowed after the 6th year)

• Interest Rate: Determined quarterly by the government (historically around 7-8%)

• Tax Benefits: EEE (Exempt-Exempt-Exempt) status under Section 80C

• Best For: Investors looking for long-term, tax-free returns with principal protection.

2. National Savings Certificate (NSC)

NSC is another government-backed savings instrument aimed at small and medium investors.

• Tenure: 5 years

• Interest Rate: Fixed and compounded annually (around 6.8% as of recent updates)

• Tax Benefits: Eligible for deduction under Section 80C, but interest is taxable

• Best For: Risk-averse investors looking for guaranteed returns with a mid-term investment horizon.

3. Fixed Deposits (FDs)

Fixed deposits (FDs) offered by banks and NBFCs provide guaranteed returns over a fixed period.

• Tenure: Ranges from 7 days to 10 years

• Interest Rate: Varies between 5-8%, depending on tenure and bank policies

• Tax Benefits: Tax-saving FDs offer benefits under Section 80C (5-year lock-in required)

• Best For: Investors looking for low-risk, fixed returns with flexible tenure options.

Let us delve a little deeper into some of the exciting higher-yield fixed income opportunities.

4. Bonds

• In simple words, bonds are a debt instrument issued by the borrower indicating the amount borrowed from the lender.
• Bonds can be issued by various agencies like the Government, State Governments, PSUs, Corporates, etc.
• Borrowers issue bonds under schemes like fixed interest rate bonds, variable interest rate bonds, covered bonds, market-linked debentures, etc.

In July ’21, RBI has opened the doors for retail investors to invest in Government securities. While detailed guidelines on this are awaited, this is a clear pointer that alternate fixed income investment opportunities are opening up.

Corporate Bonds yields are much higher than Government securities aiding higher wealth creation opportunities. The Corporate Bond market stands at approximately ₹36 lakh crores (as of Jun’ 21) and has grown at a CAGR of 15% over the past 10 years. This provides ample depth and choice of investment opportunities within this asset class.

Direct investment into corporate bonds provides the opportunity to invest directly into the entity without paying additional management fees. 

Also, certain corporate bonds are issued in the form of covered bonds, which improves the instrument’s overall security structure, improving the safety net. Certain securities are issued as Market Linked Debentures providing, an efficient tax structure.

5. Debt Mutual Funds

Debt mutual funds pool money from investors to invest in a diversified portfolio of fixed income securities like government bonds, corporate bonds, and money market instruments.

• Types: Liquid funds, ultra-short duration funds, gilt funds, credit risk funds, etc.

• Risk Level: Varies by fund type, ranging from low (gilt funds) to high (credit risk funds)

• Expense Ratio: Typically between 0.5% and 2%

• Best For: Investors looking for diversified exposure with professional management.

6. Government Bonds & Securities

Government bonds and securities, including G-Secs and Treasury Bills, are considered the safest fixed income investments as they are backed by the Government of India.

• Types: Long-term bonds, floating rate bonds, inflation-indexed bonds

• Tenure: Ranges from short-term (91-day T-Bills) to long-term (up to 40 years)

• Interest Rate: Typically between 6-7%, based on the RBI’s monetary policy

• Best For: Conservative investors seeking risk-free returns.

7. Money Market Instruments

Money market instruments are short-term debt securities with maturities of up to one year, making them highly liquid investments.

• Types: Treasury Bills (T-Bills), Commercial Papers (CPs), Certificates of Deposit (CDs), Call Money

• Interest Rate: Generally lower than long-term bonds but offer higher liquidity

• Best For: Investors looking for short-term parking of funds with moderate returns.

Why Consider Alternative Fixed Income Investments?

While traditional fixed income investments like PPF, NSC, and FDs provide safety, their returns may not always beat inflation. Alternative options like corporate bonds and debt mutual funds offer higher returns while still maintaining a lower risk profile than equities and cryptocurrencies.

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Key Benefits of Fixed Income Investments:

• Capital Preservation: Less volatile than equity investments

• Steady Income Stream: Regular interest payments (coupon payments)

• Diversification: Reduces overall portfolio risk

• Tax Efficiency: Some options provide tax-saving benefits

Final Thoughts

Fixed income investment instruments provide an excellent way to build wealth while managing risk. Whether you are a conservative investor looking for safety or someone seeking higher yields with moderate risk, there are plenty of options available in India. By understanding your risk appetite, financial goals, and liquidity needs, you can choose the right fixed income investment to secure your financial future.