7 Best Fixed Income Investment Options Comparison: Find Out Which One Is Right For You Now
Falling interest rates and changes in tax rules have changed the fixed income landscape over the past 2-3 years. The SBI’s five-year fixed deposit rate fell from 6.85% at the end of 2018 to 5.40% today. But interest on term deposits is fully taxable, and the after-tax return in the 30% tax bracket is a paltry 3.7%, which is more than 130 basis points behind. consumer inflation in urban areas.
Other borrowing options also provided moderate returns. With the exception of credit risk funds, all categories of debt funds have generated returns of 4% to 6% in the past year. “Fixed income investors need to rethink their performance expectations. They shouldn’t expect the returns that debt investing gave 2-3 years ago, ”says Raghvendra Nath, Managing Director of Ladderup Wealth Management.
The impact of tax on declarations
This week’s cover story takes a look at the various fixed income option investors and examines their usefulness to investors. “The choice of investment will depend entirely on how quickly you need the money,” says financial planner Pankaaj Maalde. We have defined four main categories of financial objectives according to the investment horizon.
Very short term: 3-6 months
If you have a large amount of money (proceeds from the sale of real estate or an investment that has expired) and you need to redeploy it in 3 to 6 months, keep the money in a fixed deposit or liquid fund. Yields won’t be very high, but that shouldn’t be a problem. When the investment horizon is so short, the focus should be on capital protection and liquidity, not on returns. Even if the return is 1 to 2 percentage points higher, it won’t have a big impact in 3 to 6 months.
In fact, if your bank offers a higher rate on the savings account balance, you may even consider keeping the money in your bank account. Some banks, including Kotak Mahindra Bank, IndusInd Bank, Bandhan Bank, Lakshmi Vilas Bank, and RBL Bank offer up to 6-6.5% interest on the savings account balance if the amount exceeds a certain threshold. Under Sec 80TTA, up to Rs 10,000 of interest on the savings bank balance is tax exempt. This will reduce the overall tax on interest earned on your bank balance.
The other option could be liquid funds and ultra short term debt funds. Government bond yields have risen in recent months and could rise further if inflation rises. But these funds will not be affected because they hold very short term instruments.
For those who focus too much on reducing taxes, arbitrage funds can be a good option. The category has generated returns of 4.18% over the past year, which is comparable to the returns generated by the debt fund categories. But these arbitrage funds are treated for tax purposes like equity funds, meaning short-term gains will be taxed at 15%.
When do you need the money?
The time horizon will define which instrument is right for you.
Short term: 1-2 years
The investment options will not change too much if your investment horizon is slightly longer at 1-2 years. You can also consider corporate term deposits, where interest rates are slightly higher than those offered by banks. But keep in mind that business deposits are not as secure as bank deposits. You need to be careful even when investing in bank deposits. “Limit exposure to Rs 5 lakh per bank so that your investments are covered by the deposit insurance scheme,” advises Mrin Agarwal, founding director of Finsafe India.
It would also be a good idea to invest in short term debt funds. The benchmark 10-year government bond yield, which has hovered around 6% for most of this year, has already risen to 6.34% and is expected to rise further. “Don’t venture into medium to long term bond funds at this point,” says Maalde. However, funds holding short-term bonds will not be impacted.
Arbitrage funds can be very useful if the holding period is a year or more. Since these schemes are treated as equity funds by the tax authorities, earnings of up to Rs 1 lakh will be tax exempt.
Medium term: 3-5 years
Your options expand if you can stay invested for more than three years. On the one hand, if the holding period is three years or more, the debt fund gains are treated as long-term capital gains. They are not taxed at the slab rate but at 20% after indexation. Indexation takes into account consumer inflation during the holding period and accordingly increases the purchase price of the asset to account for inflation. So if you bought an asset for Rs 10,000 three years ago and the cost inflation index has increased 10% since then the asset will be deemed to have been bought for Rs 11,000. “L ‘High inflation is here for a while, which means indexation can dramatically reduce effective taxes,’ says Sandeep Bhalla, financial consultant and former Mumbai-based banker.
If you’re willing to wait five years, you can also consider postage programs like National Savings Certificates, Kisan Vikas Patras, and the Monthly Income Program. These small savings plans offer higher interest than bank deposits while the sovereign guarantee makes them completely safe. The problem is, they are not very flexible. NSC cannot be seized, although Kisan Vikas Patras can be sold after 30 months. Seniors (over 60) can consider the Senior Citizens’ Saving Scheme, which offers a 7.4% yield and pays interest quarterly.
Long term: More than 6-7 years
Until last year, the Employee Contingency Fund was the best long-term investment in debt. Employees covered by the plan could set aside a large portion of their salary to earn 8.5% tax-free income. But this year’s budget changed the rules and took some of the shine out of the Contingency Fund. From now on, interest earned on an employee’s contribution above Rs 2.5 lakh will be taxed. Even so, experts say that the PF remains the best option in the long run and that the limit of Rs 2.5 lakh for tax-exempt contributions to the scheme should absolutely be exhausted.
Another tax-free option worth considering is the PPF. At 7.1%, this is much better than other small savings plans and bank deposits. But it has an annual investment limit of Rs 1.5 lakh. If you’ve already exhausted this limit, you may want to consider RBI Floating Rate Savings Bonds which currently offer 7.15%. These bonds have a maturity of seven years and the interest rate is 35 basis points higher than the rate offered on National Savings Bonds.
If you want to save for your daughter, opt for the Sukanya program which offers 7.6% interest free of tax. But it is only open to girls under 10.