Role of fixed income in your financial plan

Gaurav Seth
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Gaurav Seth

Role of Fixed Income in your financial plan

A fixed-income investment is an investment option that provides returns on a fixed schedule. However, payments may vary. One of the most common options of investment is an individual bond. This category also includes postal savings systems, bond funds, corporate deposits, certificates of deposit, and money market funds. 

Why do you need Fixed Income in your financial planning and management?

  1. Economic Goals: There are different economic/financial goals at various stages of life. These goals can be short-term, medium-term, or long-term. Equities are primarily targeted at long-term goals, while fixed income provides solutions for short-term, medium-term, and long-term goals. 
  2. Reduced risk: Different investors have different tolerance and capacity for risk. For example, retirees are less willing to take risks than young investors. As an asset class, fixed income is significantly less risky than equities and is suitable for investors with low to medium risk tolerance. 
  3. Regular Income: Some investors, such as retirees, may require steady income from their investments. There may be other situations in life which may require income from investment, such as taking a sabbatical to start studying from work or supporting a child while studying. Regular deposits are an ideal investment solution when you need a stable income. 
  4. Variance by asset allocation: Variance/Diversification of asset allocation allows you to take the optimum risk according to your risk tolerance. Asset allocation is essential to diversify risk while providing adequate returns to achieve financial goals. For asset allocation, you need to combine bonds and stocks into your investment portfolio. 
  5. Liquidity: Emergencies can occur at any stage of life. You need emergency funds that can be easily converted into cash in an emergency, such as sudden unemployment or unexpectedly high expenses. 

Short-term goals also require a high level of liquidity, as such investments cannot take high risks. Bonds are needed for liquidity needs, such as emergency planning and short-term goals.

What are some of India's best government investment options offering fixed income? 

Public Provident Fund (PPF) 

It is one of the most popular long-duration investment programs supported by the Government of India. It also offers attractive interest rates that are entirely tax-exempt. The investment period is 15 years and can be extended with an optional five-year block. The maximum investment amount for one year is 15,000 rupees. 

Voluntary PFs 

Another investment option for fixed income is the voluntary provident fund. This is just an employee's contribution to the provident fund account. This may be a good option for risk-averse investors looking to build wealth in the long run. 

Listed PSU bonds

These are bonds issued by government-sponsored companies and have a shallow risk of default. Income generated from interest on these bonds is entirely exempt from income tax. However, capital gains may be taxable. 

Sukanya Samriddhi Yojana (SSY)

A small deposit system for girls was launched as part of the "Beti Bachao Beti Padao" campaign. These are currently offering an interest rate of 7.6%, benefiting from income tax. This system can be used at any time from the daughter's birth to the 10th year. The minimum deposit for the system is 1000 rupees, and the upper limit for this year is set at 15,000 rupees. The account can be operated for 21 years from the opening date or until the girl's marriage 18 years later. 

Pradhan Mantri Vaya Vandana Yojana (PMVVY) 

Introduced by the Life Insurance Corporation (LIC) of India, PMVVY is a way to provide social security to seniors over the age of 60 from a decline in future interest income due to adverse economic conditions. The investment limit has been extended from 7.5 Lakh rupees to 15 Lakh rupees this year. The good thing about this plan is that it offers an insured pension based on an annual rate of return of 8% for ten years.


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