Fixed income opportunities in the present investment landscape

Vasant G Hegde

Stock markets hit new highs after the results of assembly elections in five states. Demand for bullion too was unabated as spot gold prices touched Rs 64,000 per 10 gms or $ 2,160 per ounce. Bitcoin, which had a decent year, rallied from $ 20,000 at the beginning of the calendar and is presently trading at $ 44,000. Interest rates on fixed-income products have also been benign as inflation refuses to moderate.  It’s one of those rare years when all asset classes have done well & investors, irrespective of their risk appetite, have every reason to be happy. 

It is not that there are no headwinds. A spike in oil prices & US Federal Reserve increasing the rates could derail the rally in stock markets. 

If you are one of those who are not comfortable with the market gyrations and are looking at a steady income stream, there are several opportunities in debt or fixed income. That said, it does not mean that there are no risks in fixed-income investments. Let us look at the wide bouquet of products that are available based on varying levels of risk:

Low Risk:

Bank Fixed Deposits (FDs)

Of all the investment options, bank deposits have always been the safest & most popular bets for households across India. The returns are guaranteed and default risk is almost zero. Most banks offer interest rates ranging between 7% to 8.50%. With stringent RBI guidelines, the chances of a bank going bust are negligible All banks offer an additional interest rate of 0.5% for senior citizens. Interest earned on FD though is taxed as per your tax slabs. The deposits are guaranteed up to Rs 5 lakhs by Deposit Insurance and Credit Guarantee Corporation in the event of collapse.

Public Provident Fund (PPF)

This small savings scheme is suitable for people of all ages since there is neither any minimum nor any maximum age limit. The scheme offers an interest rate of 7.1% currently and can be opened in post offices and branches of most banks. While the interest earned is exempt from tax, balances lying in the account cannot be attached by any court decree.

Senior Citizen Savings Scheme (SCSS)

This scheme which is suitable for senior citizens offers the highest interest rate of 8.20% and is a good option for seeking regular income. Interest is paid quarterly which can be used to meet expenses. The maximum that can be invested in the scheme is Rs 30 lakhs.

Post Office Monthly Income Scheme (POMIS)

This scheme is very popular for its perceived safety and offers a monthly income to depositors. The current interest rate is 6.6%. A maximum amount of Rs 9 lakhs can be invested in a single name while it is Rs 15 lakhs if done jointly. There are no tax benefits either on the investment or interest amount.

RBI Floating Rate Savings Bond

This bond offers a variable interest rate linked to the National Savings Certificate. The current interest rate is 8.05% & is payable half yearly. The only negative aspect is that it has a tenure of 7 years and is good if you can trade liquidity for safety. Bonds can also be bought on the RBI Retail Direct portal now.

National Savings Certificates (NSC)

NSCs which come in many denominations can be bought in any post office in India & has a tenure of 5 years. The current interest rate is 7.70% and it is exempt from tax. Tax benefits can be claimed under Section 80C up to Rs 1.50 lakhs. 

High Risk:

Corporate Bonds & debentures

Corporate bonds are issued by companies to meet their long-term funding requirements. While they offer returns which are 1-2% more than government securities, they carry higher credit or default risk. You can minimise default risk by investing in top-rated bonds. Then there are non-convertible debentures (NCDs) issued by companies and offer high returns and are either secured or unsecured, with the latter category offering higher interest rates.

In the final analysis, before you choose a product, make sure that it is in line with your investment horizon, matches your risk appetite, besides offering you liquidity and tax benefits.

A better strategy would be laddering in investments, where you invest in multiple assets with different maturities, creating a staggered distribution of income while minimising risk. You can think of it like building a ladder, each rung representing an investment with a specific maturity date. Laddering reduces the need to predict when interest rates will rise or fall.

(The author is a CFA & former banker, presently teaching at Manipal Academy of Higher Education, Bengaluru)