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Fixed Income Instruments

IndianMoney.com Research Team | Posted On Friday, September 28,2018, 06:08 PM

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Fixed Income Instruments

 

 

Fixed Income Instruments are secure investments for those investors who are risk averse. An investor can choose to invest only in Fixed Income Instruments, if he can’t handle risk. He can also choose to diversify his investment in equity and debt, for moderate risk and return. Either way, Fixed Income Instruments provide secure and guaranteed returns to investors.

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How do Fixed Income Instruments Work?

Buying Fixed Income Instruments essentially makes the investor a lender to the issuer. Interest is paid at regular intervals like monthly, quarterly, annually, or at any other pre-determined frequency. The interest rate is fixed and that’s why the investment is called Fixed Income Investment. Such investments are made for a certain time called maturity. At maturity, the issuer repays the principal to the investor, so the investor earns interest and the principal is returned.

Fixed Income instruments, although referred to as “risk-free investments”, do carry certain risks. Interest Rate Risk, Liquidity Risk, Inflation Risk, and Credit Default Risk are inherent to Fixed Income Instruments.

Types of Fixed Income Instruments

Fixed Income Instruments vary vastly in interest rates, maturity, and purpose, depending on the type. Some of the common Fixed Income Instruments are:

1. Fixed Deposits (FD)

FDs are the most widely known type of Fixed Income Instruments. Fixed Deposits offer higher interest rates than savings bank accounts. Customers can deposit money with a bank, as low as Rs 1,000 for a specific period of time and earn interest on the deposited amount. The tenure of the loan ranges anywhere from a few days to several years. The tenure can be chosen by the depositor as per his requirement, and the banks offer interest rates depending on the tenure and other factors. Interest rates for some of the most common banks for a Fixed Deposit of 5 years and above are given below:

BANK

INTEREST RATE (% p.a)

Bharat Co-operative Bank

8.25

Punjab National Bank

7.20

Yes Bank

7.10

Indus Ind Bank

7.00

Andhra Bank

6.50

Bank of Baroda

6.50

ICICI Bank

6.50

Axis Bank

6.25

Canara Bank

6.25

State Bank of India

6.25

HDFC Bank

6.00

The interest rates can vary depending on the tenure of the deposit. 5 Year tax saver Fixed Deposits also offer tax savings to the investor under Section 80C up to Rs 1.5 Lakhs a year.

2. Senior Citizen Saving Schemes (SCSS)

This scheme is available for people aged 60 and above. It offers higher interest rates compared to a regular fixed deposit. The tenure of the scheme is 5 years, with a one-time option of extending it by 3 years. SCSS also provides tax benefits to investors, who can claim the investment as a deduction from taxable income under Section 80C of the Income Tax Act up to Rs 1.5 Lakhs a year. Additionally, Tax Deducted at Source (TDS) is applicable if the investment earns an interest more than Rs 50,000 a year. The current interest rate is 8.7% effective October 1st. A Senior Citizen Savings Scheme account can be opened at these banks:

  • Allahabad Bank
  • Andhra bank
  • Bank of Maharashtra
  • Bank of Baroda
  • Bank of India
  • Corporation Bank
  • Canara Bank
  • Central Bank of India
  • Dena Bank
  • IDBI Bank
  • Indian Bank
  • Indian Overseas Bank
  • Punjab National Bank
  • State Bank of India
  • Syndicate Bank
  • UCO Bank
  • Union Bank of India
  • Vijaya Bank
  • ICICI Bank

3. Post Office Monthly Income Scheme (POMIS)

POMIS accounts can be opened at any post office either individually or jointly by two or three persons. The maximum amount of investment in a POMIS account is Rs 4.5 lakhs individually and Rs 9 Lakhs in joint ownership. The interest rate is 7.7% which is payable monthly and the interest rate changes each quarter.

The investment and interest do not provide any tax benefits to the investor under Section 80C, but do offer convenience on maintaining the account. Once the account is opened, there is no need to visit the post office daily as the earnings are automatically credited to the Post Office Savings Account and can be transferred from savings account to the recurring deposit of the same post office.

4. National Savings Certificate (NSC)

National Savings Certificates are investment tools that help the investor earn interest on his investment and get tax benefits at the same time. The interest rate for NSC is currently at 8%, with a maturity lasting 5 years. The interest is calculated annually but it is paid out only upon maturity. Every year, the interest earned is reinvested and compounded to higher interest each subsequent year. The initial investment can be claimed as a deduction to tax under Section 80C, in the year that the NSC was purchased. The interest that is reinvested must be shown as income from other sources and can be claimed as a deduction under Section 80C for the respective year.

5. Employees’ Provident Fund (EPF)

Employees’ Provident Fund (EPF) is a savings scheme that is available to all salaried employees. It a scheme managed by the Employees’ Provident Fund Organisation (EPFO). An equal amount by the employee and employer, which is 12% of basic pay plus dearness allowance, is contributed to the fund. For organizations with less than 20 employees, 10% is contributed. Funds are pooled from many employees and the money is invested by the trust. This investment earns an interest between 8 – 12%, as decided by the government. For the year 2017-18, the interest rate is 8.55%. The rate for FY 2018-19, will be declared in Feb-March 2019. PPF offers 8% effective October 1st 2018.

6. Sukanya Samriddhi Yojana

The Sukanya Samriddhi Yojana is a welfare scheme of the government, launched as a part of the “Beti Bachao, Beti Padhao” campaign. It is aimed solely at the girl child, to meet her education and marriage expenses. Investing in this scheme gives tax benefits in the form of deductions under Section 80C, and the maturity amount with the accrued interest is exempt from tax. The current rate of interest in this scheme is 8.5% per year.

7. Corporate Fixed Deposits

Corporate Fixed Deposit is an investment in a company for a fixed period and rate of interest. Financial Institutions and NBFCs also accept these deposits. With approval from RBI, companies can take deposits from the public and offer slightly higher interest rates than bank FDs. Companies offer rates which are 1-3% higher than bank interest rates. The deposits are governed by the Companies Act. They are unsecured loans, and if the company defaults in payment, the investor cannot recover the investment. This makes a very risky investment. Because of this, investors must be very careful before investing in corporate fixed deposits. Credit Rating of the company is one factor that can help determine safety of the investment.

Companies such as CARE, CRISIL, ICRA, rate Corporate Fixed Deposits and Corporate Bonds. The general rating scale starts from AAA, which is the highest safety level, and goes down to AA, A, B, C, and D. D stands for Default which is the lowest rating and indicates that the investment is in default or is going to default. The rating agency may also attach a ‘+’ (plus) or ‘-‘ (minus) sign for ratings from AAA to C, to indicate relative position within the respective category. Investments with the AAA rating are the safest options for investment.

Over the past month, credit agencies have drastically downgraded the rating of debt instruments of Infrastructure Leasing & Financial Services (IL&FS). The rating has gone down from ‘AAA’ in August to default status in the past week, which is a “Junk or Non-Investment Status”. IL&FS has defaulted in payments to several investors and creditors.

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