Fixed-income products are investment instruments that offer a fixed and stable return on the investment over a specific period of time. In India, investors have access to various fixed-income instruments like FD, PPF, and NSC. These reliable instruments allow investors to park their funds and earn good returns without the fear of market risks and capital loss. However, when you’re thinking about adding fixed-income products to your portfolio, you must consider some factors. This article outlines the 5 factors to consider when investing in fixed-income products like FD, PPF, and NSC so that you invest wisely.

• Check the interest rates and returns offered by various fixed-income products.
• Review the liquidity clause and lock-in periods of fixed-income assets.
• Understand the tax implications of investments and choose ones that match your investment goals and horizon.

Fixed-income products can offer stability to your portfolio against market volatility. If you’re thinking of parking a part of your corpus in fixed-income assets, here’s a list of factors you should consider before making a choice:

Interest rates

One of the most crucial factors to consider when investing in fixed-income products is the applicable interest rate. This is vital because your total returns from the investment can vary depending on the instrument you pick. FD interest rates generally range from 6% to 8% p.a., and the rate remains steady throughout the investment duration. PPF, on the other hand, currently offers an attractive interest rate of 7.1%, but this rate is quarterly reviewed and revised by the government. For the ongoing quarter (July to September 2024), NSC is offering a 7.7% rate of interest. NSCs function like FDs, where the interest rate remains unchanged once you commence the investment. However, the government revises rates for fresh NSCs every quarter. Remember to review the interest rates and returns from these fixed-income securities in light of inflation. Inflation has the power to diminish the purchasing power of money. Therefore, you should calculate returns after taking stock of the inflation rate. If you are looking for a safe investment option, you can consider fixed deposit. They offer guaranteed returns and a fixed interest rate throughout your investment tenure. You can consider investing Bajaj Finance Fixed Deposit. With a top-tier AAA rating from financial agencies like CRISIL and ICRA, they offer one of the highest returns, up to 7.95% p.a.

Liquidity and lock-in periods

Different fixed-income products offer different degrees of liquidity. Considering the liquidity aspect of a fixed-income investment is crucial, especially if you might need to access your investment in the short term. For instance, FDs are considered relatively liquid since you can make premature withdrawals post-interest rate penalties. However, 5-year tax-saver FDs come with a mandatory 5-year lock-in period and no premature withdrawal clause. While PPF has a 15-year lock-in period, you can make partial withdrawals of up to 50% of the investment corpus from the fifth year onwards. However, only one partial withdrawal is permitted in a fiscal year. Alternatively, NSCs have a fixed lock-in period of 5 years, during which premature or partial withdrawals are generally not allowed. However, exceptions are made in special cases, such as the death of the investor or under a court order.

Tax implications

Another factor to consider when investing in fixed-income products is the tax implication of your investment. Regular bank fixed deposit accounts do not provide any tax benefits. In fact, the income earned from the FD is added to your annual income and taxed as per your applicable income tax slab. TDS is also applicable on interest exceeding Rs. 40,000 annually (Rs. 50,000 for seniors). Only 5-year FDs qualify for 80(C) deductions. Conversely, PPF is an excellent tax-saving fixed-income product since the scheme qualifies as an EEE (exempt-exempt-exempt) investment. In other words, your contributions (up to Rs. 1.5 lakhs/year), interest accrued, and the maturity sum are all tax-free. NSC strikes a middle ground between the two, with the principal qualifying for 80(C) deductions up to Rs. 1.5 lakhs. While the interest is exempt from tax for the first 4 years, it is taxable in the 5th year. However, unlike FDs, NSC does not qualify for TDS.

Investment tenure

When investing in fixed-income products, you must assess your investment tenure carefully. Remember that your investment tenure should match your financial goals. Since different goals have different timelines, you must pick fixed-income assets accordingly. For instance, FDs offer a wide array of tenure options - ranging from 7 days to 10 years. This makes them suitable for both short-term goals, like buying a bike that you wish to achieve in a couple of years, to long-term ones, like buying a house. With a 15-year tenure, PPF is a retirement-focused long-term savings instrument. This makes it best suited for long-term wealth accumulation and retirement planning. NSCs, on the other hand, have a 5-year tenure, which makes them suitable for medium-term goals like planning a vacation.

Risk exposure

While many investors assume that considering this factor when investing in fixed-income products is unnecessary, it is actually quite important. This assumption is general since all three fixed-income products - FD, PPF, and NSC - are ultra-low-risk investment instruments. However, there are a few nuances to consider. PPF and NSC are both government-backed savings schemes that offer high levels of capital safety and 100% protection from credit risks. Bank FDs are also considered relatively safe investment instruments since each bank deposit is protected by the DICGC insurance cover of Rs. 5 lakhs. However, corporate FDs do not enjoy this insurance cover that protects investors against default risks. You can review the risks and reliability of a corporate FD by checking the issuer’s credit rating provided by agencies such as CRISIL and CARE.

Investing in fixed-income products like FD, PPF, and NSC can be a prudent move to stabilise your portfolio with guaranteed returns. While each option offers its own set of benefits, it’s best to consider the 5 factors mentioned above when investing in any fixed-income product. For instance, if you prioritise liquidity and relatively high interest earnings, FDs may be the best option. However, if you’re looking for a long-term investment option for retirement planning, PPF may be the better choice. Apart from these fixed-income products, you can also consider other fixed-income assets like debt funds and liquid funds that offer higher market-linked yields, albeit against slightly higher risks.