Some debt instruments you can consider in these times of rising interest rates
Investors with a low risk appetite can opt for fixed income instruments. Some provide regular income. Others offer deferred returns. Some also offer tax saving. The long term debt instruments provide a pre-stated rate of returns over a long term. However, the returns are relatively low. Also, these instruments are not very liquid.
Bank deposits
Then there are bank deposits. The tenures may range from a few days to five years. The interest rates are fixed in advance and remain the same through the tenure of the deposit. The interest earned is subject to tax. The interest may be up to 10 percent. After tax, you may get returns up to seven percent. The deposits are safe.
NSC, KVP
You can also look at post office saving schemes such as National Savings Certificate (NSC) and Kisan Vikas Patra (KVP). These are for 5-7 years. There is an overall limit for investments in monthly income schemes. A bonus is paid at the end of the tenure. There is no limit for investment in National Savings Certificate and Kisan Vikas Patra. The interest earned is taxable. You can pledge them as security for a loan.
SCSS
There is also the Senior Citizens' Saving Scheme (SCSS) for senior citizens, with deposits up to Rs 15 lakhs, The interest offered is nine percent and the tenure is five years. The interest earned is regular, but is also subject to tax.
Infrastructure bonds
They are available for 10-15 year tenures with an initial lock-in period of five years. The interest is around nine percent, and is subject to tax. The holding period is pretty long. The Income Tax Act allows an additional deduction of Rs 20,000 for investments in these bonds.
PPF
The Public Provident Fund (PPF) is available for 15 years and can be extended for another five years. The interest is tax-free, but is credited to the account and cannot be withdrawn on a regular basis. The maximum investment per annum is Rs 70,000 for an individual.
In all these cases, the interest rates are fixed in advance and remain the same for the tenure of the scheme.
Debt funds
Fixed maturity plans (FMPs) are offered by mutual funds. They may offer higher post-tax returns than other schemes. However, the returns are not fixed in advance. You can index the growth using the Cost of Inflation Index, taking home higher post-tax returns. Though they are listed on exchanges, FMPs are essentially not liquid and have to be held till maturity. Although the returns are higher, there is an element of risk
You can also look at debt funds. They offer a high level of liquidity and good returns. Although the returns may be higher, there is element of risk as well. The value of the investment keeps changing depending on the movements in the market interest rates. As the interest rates increase, the NAV comes down. The shorter the tenure of the debt fund, the lesser the impact of changes in market rates. As such, many of the mutual funds manage portfolios with very short tenures when interest rates are increasing. This way, they can reduce the impact of market rates on the portfolio value. Most debt fund products are short-term in nature with a tax benefit if held for over a year.
It is to be noted that liquidity may be limited in many of these instruments. There may be a penalty for premature withdrawal.
