Different Types Of Fixed Income Instruments (2024)

Fixed income instruments are financial instruments that offer assured returns along with capital protection. They are latent to market volatility and offer a fixed rate of interest throughout the investment period.

If you have a moderate or low-risk appetite, you can opt for a fixed income instrument to build your financial corpus for different life goals. Here are the various fixed income avenues that you can contemplate investing in and make a part of your portfolio.

Fixed Deposit

A fixed deposit (FD) is a popular fixed income financial instrument in India. It’s a relatively simple product and one of the most common offerings from financial institutions such as banks, post offices, and non-banking financial companies (NBFCs). Here you deposit a lump sum on which you get a fixed rate of return throughout the investment period (tenure).

In an FD, you lend a certain sum of money to the financial institution upon which you earn interest. On opening an FD, you get a certificate of deposit that mentions the principal amount, rate of interest, investment tenure, and maturity amount. Upon maturity, you get the principal amount along with the interest earned.

Different Types of FDs

There are two types of FDs on offer – regular and tax-saving.

Regular FD

• The investment tenure can range from a week to up to 10 years.
• You can liquidate a regular FD before maturity. If you do so, you need to pay a penalty.

Tax-saving FD

• The investment tenure is up to five years. As the name suggests, investment in a tax-saving FD qualifies for tax deduction under Section 80C of the Income Tax Act, 1961.
• You can’t break a tax-saving FD before maturity. The proceeds are payable only upon completion of the term period, i.e., five years. If you are a senior citizen, the rate of interest of your FD is slightly higher than what’s on offer otherwise.

Advantages of an FD

Easy to Understand

FD is a relatively simple product. There are no complexities involved. You deposit lump sum money on which you earn interest. Also, the rate of interest, even if revised midway, remains the same. In other words, your FD will earn the same interest rate that prevailed at the time of booking even if the financial institution lowers it midway.

Loan Facility

This loan facility is another major benefit of FDs. You can pledge your FD as collateral for obtaining a loan. Though the amount varies across lenders, generally, you can avail 80% to 90% of the FD amount as a loan. So, in case you require money for any purpose, you can pledge your FD as security and obtain the desired loan.

Flexible Tenure

As said, the tenure of a regular FD ranges from a week to up to 10 years. You can select the investment tenure as per your requirement.

Ideal Avenue to Park Money For Emergencies

An FD is an ideal avenue to park money for emergencies. As you can access it easily in times of need, it’s a good option to save up for a contingency. You can deposit money equivalent to six months or a year’s expense in a regular FD.

Public Provident Fund

Public Provident Fund or PPF is another popular fixed return instrument that you can invest in to build a corpus for goals such as children’s higher education, marriage, and retirement. A Government of India (GoI) backed scheme, PPF has a lock-in period of 15 years.

It means you can withdraw the entire amount only after the completion of 15 years, though partial withdrawals are permitted subject to certain conditions. Also, note that if you wish, you can extend the period by five years more after the completion of 15 years.

How to Open a PPF Account?

You can open a PPF account in any bank or post office. You can complete the process online or offline. All you need to do is to fill up the required form and produce these documents:

• PAN Card
• Aadhaar Card/Voter ID Card/Driving License, etc. as KYC documents
• Passport-size photograph

You can invest a minimum of INR 500 and a maximum of INR 1.5 lakh in a fiscal in your PPF account. While earlier only 12 deposits were allowed in a financial year, recent changes in PPF rules have removed this cap. Today, you can make an unlimited number of deposits towards your PPF account.

Advantages of PPF

An EEE Instrument

PPF enjoys an exempt, exempt, exempt (EEE) status. It means that the amount invested, interest earned, and maturity amount are entirely tax-free. You don’t need to pay any taxes on them. Thus, investing in PPF helps you lower your tax liability.

Long Lock-in Period Gives More Time to Your Money to Grow

Many subscribers often complain about the long lock-in period of PPF. However, it’s this lock-in that gives more time to your money to grow and brings the power of compounding into play. Compounding ensures you earn interest on the interest amount, and this helps you build a sizeable corpus.

Decent Interest Rate

Among several fixed return instruments, PPF enjoys a decent interest rate. The Government decides the rate of interest every quarter, and as of now, it’s 7.1% annually. Though PPF interest rates have come down over the years, the prevailing interest rate is higher than most others.

Obtain Short-term Loan

If you require any short-term loan, you can bank on your PPF account. You can obtain a short-term loan at an interest rate of 1% on your PPF account. Earlier, this rate was 2%. You can procure the loan from the third financial year till the end of the sixth financial year of operations of your account.

National Savings Certificate

National Savings Certificate, or NSC as it is commonly known, is another fixed income option that you can look forward to investing in if you want assured income. You can buy NSCs from your nearest post office.

NSC not only provides you with guaranteed returns but also helps in bringing down your tax liability as investments qualify for exemption under Section 80C of the Income Tax Act, 1961. It has a maturity period of five years.

How to Invest in NSC?

Investing in NSC is simple and easy. To do so:

• Visit your nearest post office with KYC documents (photocopy and original) and fill up the application form.
• Submit this form and the KYC documents.
• Next, you need to make payment for the amount you want to invest. You can do this either via cash or cheque.
• Post successful processing of your application, you can collect the printed certificate.

Advantages of Investing in NSC

Provides the Flexibility to Invest Small

This is a major advantage of NSC investment. You can invest in NSC from as little as INR 100. To put it otherwise, you don’t need a large sum of money to kick-start your NSC investment.

Collateral for Availing Loan

If you require a loan at any phase of your life, you can pledge your NSCs as collateral for obtaining the same. All financial institutions and lenders accept them as security.

Risk-free Small Savings Scheme

Investment in NSC is risk-free as the Government of India backs it. Also, it’s an ideal investment avenue for small savings that you can utilize to address goals such as building a corpus for a vacation or making down payment for your home or car.

Bottom Line

Each of the fixed return instruments offer guaranteed returns and are shock-proof against market volatility. Having them in your portfolio provides stability during market downturns and preserves your overall gains.