Not all investments we make should focus only on returns. While the aim to invest in equities should be growth and higher returns, fixed income investments should focus on stability, downside protection, safety and liquidity. Franklin Templetons’ episode was a harsh reminder of risks involved in debt instruments. The debt mutual fund schemes of Franklin Templeton had always been the toppers due to their high risk investments, untill the crash came. For investors it’s important to understand that purpose of investment in fixed income is not to maximize returns. Here are seven safe investment options in fixed income which ensure guaranteed returns and safety of capital.
Public Provident Fund (PPF) : PPF is one of the safest fixed income investment as it does not bear any market risk. It is is fully secured with government guarantee. PPF has a maturity of 15 years which can be further extended by five more years. It allows premature withdrawals after five years of opening the account under certain circumstances. Only one account can be opened by a citizen. The contribution to PPF is eligible for deduction under Section 80C of the Income Tax Act. Currently, PPF offers an interest rate of 7.1% p.a. The interest rate does not remain fixed and the Government revises it every quarter.
Bank Fixed Deposit (Bank FDs) : Bank FDs are most popular investment option for risk averse investors in our country. In case of a bank failure, the bank deposits upto ₹5 lakh are insured by the Government. This scheme insures all types of bank deposits including savings, fixed and recurring with an insured bank. The deposit insurance scheme covers all banks operating in India including private sector, co-operative and even branches of foreign banks in India.
All deposits maintained by the depositor across all branches of the failed bank are clubbed. However, deposits maintained with different banks are not clubbed.
7.15% RBI Floating Rate Savings Bonds : RBI Savings Bond have a maturity of seven years. The Government of India allowed to issue Floating Rate Savings Bond from July 1. The interest rate for the period July 1 to December 31, is 7.15% which will be payable on January 1 next year. The interest rate on RBI Floating Rate Savings Bond will be reset every six months. RBI Savings Bonds are not tradable in the secondary market. Interest on the RBI Floating Rate Savings Bond are fully taxable and tax will be deducted while making payment of interest on bonds from time to time.
An investor can invest in bonds for a minimum sum of Rs1,000. There is no maximum limit. These bonds offer special premature withdrawal facility to senior citizens.
Senior citizen Savings Scheme (SCSS): As the name suggests, an individual of age 60 years or more can invest in SCSS. At present, SCSS pays an interest at the rate 7.4 % per annum. SCSS allows only one deposit not exceeding Rs15 lakh. The depositors may operate more than one account in individual capacity or jointly with spouse. Maturity period is 5 years. After maturity, the account can be extended for further three years. In case of SCSS accounts, quarterly interest shall be payable on 1st working day of April, July, October and January.
Post Office National Savings Monthly Income Account (POMIS): POMIS is a five-year investment with a maximum cap of ₹4.5 lakh under single ownership and ₹9 lakh under joint ownership. POMIS offers an interest rate of 6.6% payable monthly. POMIS has a maturity tenure of five years.
Sukanya Samriddhi Accounts : This is a government scheme to save girl child where the account can opened up to age of 10 years only from the birth of the child. At present Sukanya Samriddhi Account offers an interest rate of 7.6% p.a, calculated on yearly basis , yearly compounded. It allows to make deposits for up to 15 years from the date of opening the account. Partial withdrawal is allowed once the girl child attains 18 years of age. Account can be closed after completion of 21 years. Investments towards Sukanya Samriddhi qualify for tax deduction up to ₹1.50 lakh under Sec 80C of IT Act. The interest earned and maturity are tax free.
5-year National Savings Certificates (NSC): Another post office savigs scheme, NSCs are quite popular among the HNIs to diversify their fixed income portfolio. These certificates are secure and useful for those who seek safety of capital. NSCs at present offer interest rate of 6.8 % compounded annually but payable at maturity.Deposits qualify for tax rebate under Sec 80C of IT Act. Certificates can also be purchased on behalf of a minor above 10 years of age. The interest for first four years is reinvested however, the interest earned in the fifth year is taxable as per the applicable tax slab rate.
Fixed income investors can also look at debt mutual funds. Do not chase returns while investing in debt funds. Mutual fund investors who burnt their fingers in Franklin Templeton’s debt schemes would know the risks better. Pankaj Pathak, Fund Manager- Fixed Income, Quantum Mutual Fund advises retial investors to not follow ratings blindly. He says ratings are based on returns mostly. “Retail investors should choose funds which invest into good credit quality debt like government securities or highly rated PSUs.”