Fixed Income Investments in India: A Comprehensive Guide

Indian investors have traditionally relied on fixed income investments to achieve stable returns while minimising risk. These investment choices offer individuals a reliable income stream, appealing to risk-averse investors and those in retirement. 

This comprehensive guide will look into the many forms of fixed income investments accessible in India, including their benefits and risks, as well as how to invest efficiently in them. 

What are Fixed Income Investments? 

Fixed income investments are financial securities that payout fixed periodic payments and eventually refund the principal at maturity to the investors. Some of the common examples of Fixed Income Investments are Bonds, fixed deposits, and government-backed savings programs. 

These investments are specifically designed to provide investors with consistent income while preserving capital, making them less volatile than equities.

Types of Fixed Income Investments in India 

Government Bonds

Government bonds are debt securities issued by the government to finance its expenditure needs. Because of the government’s support, these are regarded as the safest fixed income securities.

• Examples: Government Bonds, Sovereign Bonds, State Government Securities.
• Benefits: High safety, trust, and regulatory support (SEBI margin standards). Government securities like G-Secs and T-Bills can also be used as monetary collateral. 
• Returns: Typically, these bonds offer returns around 6-7% annually, depending on the specific type and tenure.

Corporate Bonds

Corporate bonds are issued by firms to raise funds for a variety of objectives. They provide better yields than government bonds, but come with a somewhat larger risk.

• Examples: Bank Bonds, NBFCs, PSU Bonds.
• Analysis Factors: Creditworthiness, financial performance, and past performance of the issuer are crucial for evaluating corporate bonds.
• Returns: Investment-grade corporate bonds typically yield between 8% and 10.0% annually. 

Municipal Bonds 

Municipal bonds are issued by municipalities or local governments to fund public initiatives like infrastructure construction.

• General Obligation Bonds: Backed by the full faith and credit of the issuing municipality.
• Revenue Bonds: Linked to the revenue generated by specific projects.

Money Market Instruments

Money market instruments are short-term debt securities that offer high liquidity and stability. These are ideal for short-term investments.

• Examples: Treasury bills, commercial paper, and banker’s acceptance.
• Returns: Treasury Bills currently yield approximately 7% annually. Other money market instruments offer moderate yields depending on the tenure and issuing entity.

Debt Mutual Funds

Debt mutual funds pool resources from many participants and invest in a wide range of debt instruments, including corporate bonds, T-Bills, and other fixed-income assets.

• Management: These funds are managed by professional fund managers who aim to provide stable returns while managing risks.
• Returns: Debt mutual funds typically offer returns between 7% and 9% annually, which is relatively more attractive than fixed deposits.

Securitised Debt Instruments (SDIs)

Securitised debt instruments involve the issuance of asset-backed securities that provide returns for investors based on the underlying assets.

• Examples: Investment platforms like LoanX by Grip Invest offer diversified, credit-rated, and SEBI-regulated SDIs.

• Returns: Credit-rated SDIs can offer pre-tax yields ranging from 11% to 16%.

National Savings Certificates (NSC)

Post offices issue NSCs with a specified maturity period, which give guaranteed returns as well as tax benefits.

• Tax Benefits: Interest earned is eligible for tax exemption under Section 80C of the Income Tax Act.

• Returns: The current interest rate for NSCs is 7.7% per annum, which is higher than traditional fixed deposits and PPF interest rates.

Fixed Deposits (FDs)

Fixed deposits are secured investment instruments offered by banks and non-banking financial corporations (NBFCs). They are known for their stability but may offer lower returns compared to other fixed-income options.

• Features: While providing safety and stability, FDs may not always offer the highest returns compared to other fixed-income investments.
• Returns: FDs currently offer returns up to 7.5% per annum for general citizens. Some NBFCs provide higher yields up to 8.8% per annum for credit-rated, high-yielding FDs.

Pros and Cons of Fixed Income Investments

Pros 

1. Provides consistent revenue, making them perfect for a continuous cash flow.
2. Reduces risk exposure by diversifying investments across different securities.
3. Concentrates on safeguarding capital in unpredictable market situations.
4. Certain fixed income instruments have tax advantages.

Cons

1. Market interest rates are subject to volatility.
2. The possibility of default by issuers, particularly those with lower ratings.
3. Inflationary pressures have the potential to reduce purchasing power.
4. Generally provides lesser returns than equity investments.

Popular Fixed Income Investment Options in India 

Public Provident Fund (PPF)

PPF is a popular long-term investment scheme backed by the Government of India that provides competitive interest rates and tax benefits.

• Investment Duration: 15 years with the option to extend in blocks of 5 years.
• Tax Benefits: Interest is tax-free, and contributions qualify for deduction under Section 80C of the Income Tax Act.

Voluntary Provident Fund (VPF)

VPF is an extension of the Employee Provident Fund (EPF) that allows employees to contribute more than the legal maximum.

• Investment Duration: The lock-in period is five years with no contribution limit.
• Tax Benefits: Under Section 80C of the Income Tax Act, 1961, employees can claim tax benefits of up to Rs. 1.5 lakh on VPF contributions. The interest on VPF is also exempt from tax, subject to a threshold limit of Rs. 2,50,000 in contributions.

Listed PSU Bonds

These bonds are issued by government-backed entities and are regarded as low-risk.

• Tax Benefits: Interest income is exempt from income tax, though capital gains are taxable.

Senior Citizen Savings Scheme (SCSS)

SCSS is intended for senior citizens and provides a regular income over a five-year period that can be extended by three years.

• Investment Limit: Up to INR 30 lakh.
• Tax Benefits: Under Section 80C of the Income Tax Act, 1961, individuals are eligible for tax deductions on investments up to Rs.1.5 lakh.

Pradhan Mantri Vaya Vandana Yojana (PMVVY)

PMVVY, which is implemented through LIC, provides social security to older individuals in the form of an assured pension based on a guaranteed rate of return.

• Investment Limit: Extended to INR 15 lakh.
• Return Rate: Guaranteed at 7.4% per annum for 10 years.

Sukanya Samriddhi Yojana (SSY)

SSY is a small deposit system designed to secure the future of the girl child, with competitive interest rates and tax breaks.

• Eligibility: For girls up to 10 years old. 
• Investment Duration: Until the girl reaches 21 years or gets married after 18.

Some of the other Fixed Income Investment Avenues in India are Post Office Recurring Deposit, Post-Office Monthly Income Scheme, Post-Office Time Deposit etc. 

FAQs

Are fixed income investments safe?

Debt funds vary in risk depending on the securities in their holdings. Government bond funds are often seen as safer than corporate or high-yield bond funds.

Can I lose money investing in fixed income investments?

Debt funds seek to safeguard money, but they are not risk-free. Interest rate changes, credit defaults, and inflation can all have an impact on the fund’s holdings and cause it to lose money.

How are fixed income investments taxed?

Interest income from fixed income mutual funds is normally taxed at the investor’s income tax slab rate. Capital gains from the sale of fund units held for more than three years are taxed at 20%, plus indexation benefits.

What is the minimum investment required in fixed income mutual funds?

The minimum investment amount varies with the mutual fund plan and fund institution. Some funds may have minimum investment requirements as little as Rs. 300, but others may require larger initial investments.

How can Aspero help with Fixed Income Investments?

Aspero is a premier platform for fixed income investing in India, with access to a wide selection of specialised debt instruments. It offers consistent and predictable returns of up to 14%, with an investment as low as ₹300. The platform is SEBI-registered, which guarantees compliance and security.