INVESTMENT portfolio comprises various asset classes like equity, fixed income, gold and real estate. Fixed income investments refer to those investments where there is a defined coupon or accrual flow. Capital appreciation may be there but the majority of the inflows in fixed income investments are from the interest component, which is referred to as accruals.
Investors should allocate some component of the overall portfolio to fixed income investments for stability in returns. As per risk-return scale, fixed income is a lower risk and lower return investment avenue than equities and the extent of allocation would depend on the risk appetite of the individual.
For a lower risk appetite, there should be a higher allocation to fixed income and vice versa, but there should be some allocation nonetheless as the entire portfolio cannot be left susceptible to higher volatility.
There are various fixed income investment avenues such as bank term deposits, company fixed deposits, post office savings schemes, PF, PPF and bonds issued by the government and companies.
The preferred avenue for fixed income investments is the mutual fund route as it provides a good combination of liquidity, safety, returns, tax efficiency and ease of operations.
Avenues like bank fixed deposits are safe and liquid, but not as tax efficient as mutual fund schemes.
Investments in bonds or debentures issued by highly rated companies would provide a coupon and potential capital appreciation, but the secondary market is not liquid and the coupons are taxable at the marginal slab rate of the investor.
There is a question of accessibility as well -apart from investments in bank or company deposits or post office schemes, the secondary market for bonds or debentures is wholesale in nature, beyond the reach of individual investors. Mutual funds, being aggregators of funds from many investors including corporate, can participate in the wholesale market and offer liquidity in the form of units of a face value of Rs 10 to unit holders.
In mutual fund open-ended schemes, liquidity is available in the form of redemption with the AMC at the NAV of the day. In case of close-ended schemes, the units are listed at the exchange (NSE/BSE) but there is no liquidity, hence investors should purchase units of close-ended schemes only when the investment horizon (6 months or a year) is clear.
In this context, it is important to understand the category of schemes so that the investor can pick the fund that suits the risk-return profile. At the starting point, there are liquid funds that are most stable. Returns may be lower than other fixed income oriented mutual fund schemes.
Next comes the category of funds earlier known as liquid plus, now called ultra short term bond funds. Returns are marginally higher than liquid, but may be slightly more volatile.
Short-term bond funds come next, which requires an investment horizon of six months to a year as it may be slightly more volatile. Return expectation here is higher than ultra short term funds. There are other categories also, which may be even more volatile, which the investor should not venture into without the guidance of a professional financial planner.