Fixed Income Investments – Taxation, Risks, Top Fixed Income Options

Investment that intend to provide investors with a fixed income in the form of interest or dividend is basically referred to as Fixed Income Investment. Additionally, fixed income investment can also include investments within an investment portfolio, such as bonds and mutual funds. In general terms, fixed income can also refer to an individual’s personal or household income or retirement, etc. 

Fixed Income Investments can be used by investors to diversify their portfolio and mitigate market risk as they are not as risky as derivatives and equity. Offering reliable and stable returns, fixed income investments are considered ideal for retired investors, who are not willing to take any risks. Fixed Income funds are actively managed by fund managers who continuously work on the investment portfolios, keeping the funds in line with the market fluctuations. Investors also have the option of withdrawing the funds whenever required because of their liquid nature.

Fixed Income Investment Products

Fixed Income Mutual Funds are not a category of funds; instead it is just a trait that the mutual funds hold. Mutual funds that offer a fixed return are fixed income investment funds. 

Given below are a few different types of funds that offer fixed income. –

1. Exchange Traded Funds

ETFs or Exchange Traded Funds are funds that are listed on the Stock Exchanges such as NIFTY, S&P 500 index, and Sensex. These funds offer fixed returns and can be traded in the cash market on a daily basis. Out of all the offerings, Gold ETFs are the most popular ones among investors.

2. Debt Funds

Unlike ETFs, Debt funds invest in comparatively safer instruments such as Government bonds, Corporate bonds and limited securities. These funds are preferred by risk-averse investors who don’t invest in volatile securities and are ready to accept lower returns at lesser risk. 

3. Money Market Funds

Money market funds are highly exposed to the market fluctuations. The returns offered on these investments varies with the ups and downs in the market. Therefore, these funds are suitable for investors with short-term investment goals. However, Money Market Funds that are known to generate fixed income include investment in commercial paper, short-term certificates of deposit and banker’s acceptance, etc.

In terms of fixed income, ETFs are considered the most ideal type of fixed income funds because of their equity-like functioning. Apart from these, Debt Funds also offer better returns than Money Market Funds in the long run. 

Taxation on Fixed Income Investments

The taxes imposed on Fixed Income Investments are as follows-

• For long term capital gains, the tax on fixed income funds with indexation is 20% and without indexation is 10%. 
• For short term capital gains, the tax imposed on income earned is in accordance to the income slab of the investor.

Risks involved in Fixed Income Investments

Irrespective of the guarantee of fixed returns offered by the fixed income investments, there are some risks associated with them.

Here is a list of some of the risks that may come along with the reliable returns in fixed income investments-

1. Inflation
2. Interest Rates
3. Currency
4. Credit and Default Risk

Top Fixed Income Investment Options in India

Below is a list of top fixed income investment options in India that you may go through if you are planning to invest in fixed income funds.

1. Public Provident Fund
2. Listed Public Sector Unit Bonds
3. Sukanya Samriddhi Yojana
4. Senior Citizen Savings Scheme
5. Pradhan Mantri Vaya Vandana Yojana
6. Debt Mutual Funds
7. RBI Taxable Bonds
8. Bank Deposits