Investing in Fixed-Income Instruments for High Returns? Is it the Right Strategy?

Are fixed-income investments suitable for high returns

Smart strategy
  • Fixed-income instruments give fixed and stable returns. Some also have tax benefits.
  • Recently, the Government hiked the interest rates on small saving schemes making them popular.
  • Despite higher returns, fixed-income avenues do not factor in inflation. Thus, equity addition makes sense.

Regarding investments, there are two primary divisions: equity and debt. While equity investments involve high volatility risks, they have more significant profit potential. On the other hand, debt instruments have no volatility risks and offer stable but limited returns.

Risk-aggressive investors love equity investments and attractive eye returns, irrespective of the risks involved. On the other hand, fixed-income instruments are loved by all. While risk-averse investors prefer these instruments for their low risks, risk-aggressive investors invest in them to add a debt component to their equity-heavy portfolio.

Making fixed-income investments attractive – The recent rate hike 

The Reserve Bank of India (RBI) has consistently increased its repo rates, making deposits more attractive. Moreover, recently, many fixed-income instruments have witnessed a rate hike. Have a look - 

 fixed-income instruments


Related - Learn more about why fixed-income schemes have gained the spotlight

With the increase in interest rates, fixed-income instruments have suddenly come into the limelight. Let's understand some of the benefits that these schemes promise –

National Saving Certificates (NSC)

  • The minimum investment amount in NSC starts at Rs. 1,000, with five years of maturity.
  • NSC is eligible for a tax deduction of up to Rs. 1.5 lakhs under Section 80C of the Income Tax Act on the investment made. Interest earned every year gets added back to the invested amount and becomes eligible for an 80C deduction.

Post-office Time Deposits

  • Flexible tenure options and affordable investment amounts starting at Rs.1000.
  • 5-year deposits attract tax deduction under Section 80C up to Rs.1.5 lakhs

Sukanya Samriddhi Yojana (SSY)

  • Saving scheme specially designed for the girl child.
  • Tax benefit under Section 80C for the investment made

Senior Citizens' Savings Scheme (SCSS)

  • Affordable deposit scheme for senior citizens. The minimum deposit amount starts at Rs.1000, while the maximum is Rs.30 lakhs.
  • Possibility of extension by another three years.
  • Investment is allowed as a deduction under Section 80C.

Kisan Vikas Patra (KVP)

  • Different types of certificates are available to suit different investors.
  • Different maturities are available, going up to 124 months.
  • Investment is allowed as a deduction under Section 80C.

Post Office Monthly Income Scheme (POMIS)

  • The minimum investment is Rs.1000, while the maximum is Rs.9 lakhs on an individual basis and Rs.15 lakhs on a joint basis.
  • Interest earned on the deposit is paid monthly to create a regular income stream.
  • The maturity tenure is five years.

Post Office 5-year Recurring Deposit 

  • Affordable investment avenue with monthly deposits starting at Rs.100
  • Availability of loan against the deposit balance.
  • Maturity of 5 years.

Fixed-income investments are excellent for investors who want stable returns and a lower level of risk. Fixed-income Investments offer several benefits to investors, such as 

  • Risk-free investment since they are Government-backed
  • Guaranteed returns
  • Protection from market volatility
  • Potential tax benefits
  • A reliable stream of income under some options

Do fixed-income instruments deliver higher returns?

While fixed-income investments can offer attractive returns, thanks to the rate hike, they do not factor in inflation. As a result, fixed-income investments may not provide inflation-adjusted returns, reducing money's purchasing power over time. Hence, if you want to offset the effects of inflation and earn potentially higher returns, you can consider equity investment avenues. 

Equity can yield attractive returns adjusted for economic inflation and help you create a suitable corpus for your financial goals. Moreover, Equity Linked Saving Schemes (ELSS) can also give tax benefits in the invested amount under Section 80C.

However, it's essential to be cautious and aware regarding investing in equities, as equity-related avenues involve market risk. If you have a short-term investment horizon, you face considerable volatility risks. However, in the long term, equity-related investments tend to deliver better returns, easing out the short-term volatility risks. 

What should you do? 

You need a diversified folio for risk mitigation and return maximisation. Fixed-income investments are suitable as they add stability to your portfolio and are backed by the government, ensuring your money is safe. But if you want to increase your return potential, consider adding equity. 

However, equity allocation boils down to your risk appetite. Therefore, assess your risk profile and then make a suitable choice. Finally, diversify your portfolio across equity and debt to get the best of both worlds. 

Related - Check out the ten best tax-saving fixed deposit schemes

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas


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