Fixed Income Instruments Expected to Witness a Growth Spurt

By BankBazaar | May 1, 2012

If you have been an investor in fixed income instruments for quite some time now, then there is no denying that this year has probably the toughest one till date, especially due to a constant fluctuation in interest rates in the country. In such a scenario, it is important to mould your behavior in accordance with the state of the market. Bank fixed deposits are the most popular modes of investment as far as debt instruments are concerned. They provide assured and less risky returns as compared to other sources of investment. In addition to this, the Deposit Insurance and Credit Guarantee Corporation of India provides an additional security cover by stating that in case the bank defaults on repaying your funds, then amounts of up to Rs. 1 lakh will be paid back to the investor. Fixed deposits are best suited for people who belong to the retired class of society, especially since such people look for steady monthly incomes. Moreover, senior citizens are eligible to get higher rates of interest than that offered to regular investors, giving them an offer hard to resist. With inflation at an all-time high, this is the best time to park your funds in bank fixed deposits.

Government schemes like post office schemes ensure steady and assured returns for an investor, making it quite a lucrative investment opportunity. The rates of interest do not undergo fluctuation as they are set by the Central Government of the country. You also enjoy a lot of safety and security with these funds, particularly because they are Government owned and managed funds. Employee Provident Funds are another option of investment for the salaried class, when they retire. It is a systematic process where a small percentage of your salary is deducted on a monthly basis and invested in your fund account. It is also mandatory for the employer to contribute from his side towards the account. In case of company fixed deposits, companies turn to the public in order to raise funds for an array of purposes like expansion requirements, starting a new business venture, to repay a loan, or to simply meet their working capital requirements. While company fixed deposits definitely offer higher rates of returns than that offered by banks, bank fixed deposits are far less risky than company fixed deposits. You also need to find out the rating of such a firm as it helps you assess the worthiness of the company. Generally, higher the rating, lower will be your return and vice-versa.

Mutual funds are another mode of investment and are best suited for people who prefer higher liquidity in investments. You will find a lot of variety in mutual funds, which includes instruments like Fixed Maturity Plans or FMPs, gilt funds, liquid funds and so on. Another reason why a lot of investors prefer mutual funds as a mode of investment is particularly because the dividend generated from them is tax-fee. You have the flexibility to choose products in accordance to your preferred interest rates and tenure. There is also an option of investing in debt funds, especially when there is scope for economic growth in the country, as it yields better returns. Debt funds offer diversification as they invest in an array of different securities. Further, they offer regular income to investors at consistent intervals.

Non-convertible debentures function in an entirely different manner as compared to the fixed deposits of banks. They lack the feature of liquidity and have a comparatively difficult procedure for exit, unlike fixed deposits that can be liquidated in an easy and quick manner. Although non-convertible debentures are listed on stock exchanges, many people believe that they offer choice of daily exit. This is just a theoretical concept as their volumes are quite limited, and as a result, on some days, no exits are recorded at all. Non-convertible debentures are best suited for individuals who do not have a large risk appetite and do not want to rise and fall as per the fluctuations of the market.

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