All About Fixed-Income Investments & Market-Linked Investments

By Dheeraj Kapoor | March 17, 2017

All About Fixed Income Investments & Market Linked Investments

All investments come with varying degrees of risk and every investor hopes for good returns, which are either risk-free or have minimal risk. With investments, risks and returns go hand in hand. Always remember, higher risk means higher returns.

We’ll help you choose

Review your investment goals. If your goals are still a few years away, you can afford to take some degree of risk with your investments.

Look at low-risk investments in case your goals are around the corner i.e. less than 3 years away.

This is when you need to make a choice between fixed-income investments and market-linked investments. Let us weigh the scales and tell you about the different options you have under each category.

Additional Reading: Habits Of Successful Investors

Fixed income investments

These are investments that offer a fixed rate of return and accumulate interest over a specific period of time. Fixed income investments have a predetermined maturity period.

You should ideally choose fixed-income investments if you require regular liquidity and if your investment goals are short term.

Which ones are fixed-income investments?

Fixed-income investments are bank Fixed Deposits, Post Office Savings Schemes, Bonds, and Company Deposits. These are ideal if you don’t want volatility in your investments. Don’t expect very high returns, though.

Looking for high returns?

Explore market-linked investments if you want relatively higher returns. Risk? Yes, you will have a certain degree of risk with market-linked investments. The risk level will depend on the type of market linked investments you choose.

Market-linked investments

Market-linked investments offer returns that depend on the performance of the equity or debt assets invested in. Remember, market linked investments do not offer fixed returns and these returns are not assured because of the probability of market volatility.

Additional Reading: Market Volatility – How Should Investors Respond?

How do market-linked investments help?

If you, as an investor, want to generate wealth for yourself, it is important to explore market-linked investment options. Your investment risk appetite depends on your age and life stage. If you’re young with minimal or no financial responsibilities, you can safely take more risks with investments.

Additional Reading: Invest Young, Retire Early

Explore equities for high returns

High returns on your mind? Investments in equities are more likely to help you achieve high returns on your investments. But wait! This doesn’t always happen. Your period of investment in equities should ideally be long enough to beat market volatility.

The minimum investment period of 3-5 years is advisable, but in order to consistently beat market volatility and ensure good returns over a substantial period, it is advisable to remain invested for 10 years or longer.

There’s one simple rule with investments in equities. The longer you remain invested, the more you gain on your investments.     

Additional Reading: In Your Early 30s? Invest More In Equities

Lump sum investments or regular small amounts?

The easiest most convenient way to dive into equity investments is through a Systematic Investment Plan. With an SIP, you can be sure to minimise market volatility on your investments and yet generate decent returns that are higher than fixed-income investments.

With equities you can choose to invest a lump sum amount and leave it to earn returns, or alternatively, you could start small and open an SIP.

With an SIP, you are committed to regularly stashing away a certain sum every month over the investment tenure. It works out easier on your pocket and is rewarding as well because a Systematic Investment Plan minimises risks in your investments.

Additional Reading: Everyone’s Going The SIP Way

Taxes

Investors often seek to avoid taxation on their investments. Interest income from many fixed-income investments are fully taxable depending on the Income Tax slab the investor falls under. This makes the post-tax returns on fixed-income investments relatively low.

Want to save taxes?

Consider a 5-year tax-saver Fixed Deposit. These tax-saver deposits or 5-year post office time deposits are eligible for tax deductions on the capital invested under Section 80C of the Income Tax Act. However, the interest component on these deposits is taxable.

Tax saving with market-linked investments

Equity-linked investments like Equity Mutual Funds, Unit-linked Insurance Plans, and investments in the National Pension Scheme are more tax efficient options.

Remain invested in these investments for a longer period and you can enjoy tax-free returns. However, investments in the NPS are partially taxable.

Additional Reading: All You Need To Know About Investing In NPS

Equity Linked Savings Schemes (ELSS) are the most popular equity investments, which offer tax benefits. These have the shortest lock-in period of 3 years among tax saving instruments.

Investments in ELSS funds can give investors tax-free returns and tax deductions of up to Rs. 1,50,000 under Section 80C of the Income Tax Act.

Unit Linked Insurance Plans (ULIPs) also provide tax benefits in addition to Life Insurance cover.

Now that we’ve given you a brief comparison of fixed-income investments and market-linked investments, review your investment goals and choose the right investments. Start investing today!

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