Investment Options in the Fixed Income Space

The fixed income markets have witnessed a choppy ride due to concerns on the downgrade/default in certain low rated NBFC’s and leveraged companies. The measures taken by RBI and Government to counter the impact of slowdown in economic activity post Covid-19 include reducing of rates by RBI and infusing additional funds in the system. This has led to lowering of yields on various debt products. However, one must look at the various debt investment products for safety of capital, need for regular income and taxation benefits.

As investors look for investments options in their portfolio, we are evaluating the various debt investment options that can be considered for fulfilling life stage goals.

Investment Options in Debt:

Considering that debt is ideally looked at from preservation of capital purpose we discuss below the various debt investment options.

Small Saving Instruments

The Government has instituted a number of small saving schemes to encourage citizens to save regularly. The main attraction of these schemes is the implicit guarantee of the government, which is the borrower, taxation benefits and attractive interest rates. These schemes are offered through the post office and select scheduled banks. The saving schemes currently offered by the government are:

  • Public Provident Fund (PPF)
  • Senior Citizens’ Saving Scheme (SCSS)
  • National Savings Certificate (NSC)
  • Post Office Schemes and Deposits
Public Provident Fund (PPF):

A PPF or Public Provident Fund is a tax-free savings scheme offered by the Government of India, wherein interest on the account is fixed and paid on a quarterly basis. The applicable interest rate on PPF for the second quarter of the year, 2020-21 i.e. from 1st July to 30th September 2020 is fixed at 7.1%. The interest rate for April to June 2020 was 7.1%.

Senior Citizens’ Saving Scheme (SCSS):

Only senior citizens of age 60 years or above, on the date of opening the account, are eligible to open an account with Senior Citizens Saving Scheme. Proof of age and a photograph of account holder are required. The age limit is reduced to 55 years in case of an individual retiring on superannuation or otherwise, or under VRS or special VRS, provided the account is opened within one month of date of receipt of retirement benefits. The retired personnel of Defence Services, excluding Civilian Defence Employees, shall be eligible irrespective of age limit.

An individual can invest a maximum amount of Rs.15 lakh, individually or jointly in an SCSS account (in multiples of Rs. 1,000). The amount invested in the scheme cannot exceed the money that has been received on retirement.

National Savings Certificate (NSC):

The National Savings Certificate is a fixed income investment scheme that you can open with any post office. A Government of India initiative, it is a savings bond that encourages subscribers – mainly small to mid-income investors – to invest while saving on income tax. A fixed-income instrument like Public Provident Fund and Post Office FDs, this scheme too is a secure and low-risk product. You can buy it from the nearest post office in your name, for a minor or with another adult as a joint account. They come with a fixed maturity period of five years. There is no maximum limit on the purchase of NSCs, but only investments of up to Rs.1.5 lakh can earn you a tax break under Section 80C of the Income Tax Act. The certificates earn a fixed interest, which is currently at a rate of 6.8% per annum which is taxable. 

As a Government-backed tax-saving scheme, you can invest for up to Rs.1.5 lakh in either PPF, SCSS and NSC for claiming the benefits of 80C deductions.

Post Office Schemes and Deposits:

Post Office Monthly Income Scheme (POMIS): As the name suggests, this scheme provides a regular monthly income to the depositors. This scheme has a term of 5 years.

Post Office Time Deposits (POTD): These are similar to fixed deposits of commercial Banks. The interest rate is calculated on a half-yearly basis and withdrawals are permitted after six months.

Bank Deposits: A bank fixed deposit (FD) also called as a term or time deposit, as it is a deposit account with a bank for a fixed period of time. It entitles the investor to pre-determined interest payments and return of the deposited sum on maturity. Fixed bank deposits offer higher returns than savings accounts as the money is available for use by the bank for a longer period of time. Fixed deposits are preferred by investors who like their money to remain with their bank and do not have an immediate need for it. Bank FDs are considered to be a safe investment option. This is because each depositor is insured up to Rs.1 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC). It includes all deposits and interest on them, held across branches of a given bank. Investment in specified (under Section 80C of the Income Tax Act) 5-year bank FDs are eligible for tax deductions up to a maximum amount of Rs.1 lakh, along with other investment options listed under the same section. These deposits are subject to a lock-in period of 5 years. The interest earned is taxable as per the investor's tax bracket and therefore, TDS is applicable. The interest on deposits is payable on either monthly/quarterly basis or can be reinvested. A person can avoid TDS deduction on the interest earned by submitting Form 15G (or Form 15H for senior citizens) to the bank.

Corporate Fixed Deposits: Corporate Fixed Deposit is a term deposit which is held over fixed period at fixed rates of interest. Company Fixed Deposits are offered by Financial and Non-Banking financial companies (NBFCs). The maturities of various company fixed deposits can range from a few months to a few years. We recommend corporate FDs from Housing Finance companies which have a strong parentage – thus credit profile is similar to the bank with an attractive spread on FD yields across maturities.

Bonds: A bond is an instrument of indebtedness of the bond issuer to the holders. It is a debt security, under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest (the coupon) and/or to repay the principal at a later date, termed the maturity date. Interest is usually payable at fixed intervals (semiannual, annual, sometimes monthly). Based on various characteristics following are the types of Bonds:

  • Based on Issuer
    • G-Secs: Government bond is a debt instrument issued by the Central and State Governments of India. Government bonds issued by State Governments are also called State Development Loans (SDLs). These are primarily long term investment tools issued for periods ranging from 5 to 40 years.
    • Corporate Bonds: Corporate bonds are debt securities issued by private and public corporations. Companies issue corporate bonds to raise money for a variety of purposes, such as building a new plant, purchasing equipment, or growing the business.
  • Based on Coupon type
    • Fixed Coupon: Such bonds have fixed rate of interest which remains constant throughout the tenure of investment irrespective of fluctuating market rates.
    • Floating Coupon: Such bonds have variable interest rate of interest. The change in rates is undertaken at intervals which are declared beforehand during the issuance of such bonds. There is another variant to FRBs, wherein the rate of interest rate is bifurcated into two components: a base rate and a fixed spread. This spread is decided through auction and remains constant throughout the maturity tenure.
    • Zero Coupon: Such bonds are issued at a deep discount to its face value but pays no interest. At maturity, investor gets face value of the bond.
  • Based on taxation
    • Tax-free: Companies such as the National Highways Association of India (NHAI), Indian Railways Finance Corporation, HUDCO, Rural Electrification Corporation (REC) issue these bonds. The interest earned on these bonds is completely tax free in the hands of the investor.
    • Taxable: Interest earned on such bonds is taxable as per tax slab of the investor.

NPS: The National Pension Scheme is a social security initiative by the Central Government. This pension programme is open to employees from the public, private and even the unorganized sectors except those from the armed forces. The scheme encourages people to invest in a pension account at regular intervals during the course of their employment. After retirement, the subscribers can take out a certain percentage of the corpus. As an NPS account holder, you will receive the remaining amount as a monthly pension post your retirement. Earlier, the NPS scheme covered only the Central Government employees. Now, however, the PFRDA has made it open to all Indian citizens on a voluntary basis. NPS scheme holds immense value for anyone who works in the private sector and requires a regular pension after retirement. The scheme is portable across jobs and locations, with tax benefits under Section 80C and Section 80CCD.

The NPS is a good scheme for anyone who wants to plan for their retirement early on and has a low-risk appetite. A regular pension (income) in your retirement years will no doubt be a boon, especially for those individuals who retire from private-sector jobs. A systematic investment like this can make a massive difference to your life post-retirement. In fact, Salaried people who want to make the most of the 80C deductions can also consider this scheme.

Debt mutual fund: There are MF schemes are suitable for investors who want steady returns. Debt mutual funds primarily invest in fixed-interest generating securities like corporate bonds, government securities, treasury bills, commercial paper and other money market instruments. SEBI intends to make Mutual Fund investment easier for the investors. Investors could invest according to their needs, Financial goals and risk ability. SEBI has circulated new Mutual Fund categorisation on 6th October 2017. This mandates Mutual Fund Houses to categories all their debt schemes (existing & future scheme) into 16 distinct categories. Overnight Fund, Liquid Fund, Ultra Short Duration Fund, Low Duration Fund, Money Market Fund, Short Duration Fund, Medium Duration Fund, Medium to Long Duration Fund, Long Duration Fund, Dynamic Bond Fund, Corporate Bond Fund, Credit Risk Fund, Banking and PSU Fund, Gilt Fund, Gilt Fund with 10-year Constant Duration and Floater Fund.

Summing up:

Debt investments can be looked at for preservation of capital. The plethora of options available in the space can be evaluated and investments should be made in category which matches the risk-return and cashflow requirements of the client.

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