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3 Key Points To Remember For Those Living On Fixed-Income Instruments

When we retire from active professional life, our main concerns are twofold; preserve the corpus that we accumulated for retirement, and get decent returns on it

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Amit Sethi
June 27, 2023
3 Key Points To Remember For Those Living On Fixed-Income Instruments

Fixed income instruments, as their name suggests, are investments that offer a predetermined return throughout their tenure. These investments generally carry lower risk when compared to assets like equity and gold. However, there are a few key considerations to keep in mind when investing in fixed-income instruments.

Invest In High-Grade Bonds Or Top-Rated Debt Funds

There are many varieties of bonds available in the market which are offered by companies when they raise funds for their businesses. The rate of interest (also known as the coupon rate) varies from company to company. Typically, the interest rate offered by large, blue-chip companies is usually lower than the relatively smaller and average companies. The reason is the risk attached to them. The average companies are relatively less stable than the large ones. Hence to attract investors, they usually offer higher interest rates.

When you choose to invest in bonds, do not simply go by the interest rate. Bonds offering unusually higher rates are known as junk bonds for a reason. This is not to mean that they will default, but the possibility is relatively higher. Hence, it’s better to go for high-grade bonds offered by blue-chip companies.

Debt mutual funds, even though they allocate a significant portion of their corpus in bonds, have a small portion of equities, which makes them different from pure bond investment. They don’t offer a fixed rate because of the presence of equity in their portfolio. However, debt mutual funds are also relatively safer as they are managed by highly skilled fund managers.

Check Fixed-Income Schemes By Government

There are several fixed-income schemes offered by the Government of India. They are quite safe and almost risk-free investments. Schemes such as Post-office monthly income scheme (POMIS), Pradhan Mantri Vaya Vandana Yojana (PMVVY), and Senior citizen saving scheme (SCSS) offer some of the best investment returns in the fixed-income universe. Some of these schemes even beat many of the debt mutual funds’ returns. For example, the return on PMVVY is 8.2% which is quite high under the fixed-income category.

Keep An Eye On Interest Rates And Their Forecast

There is an inherent risk in fixed-income instruments known as Interest rate risk. When the interest rate goes up, the value of your bonds goes down. So even though the payout to you will not reduce but when you redeem the bonds, the price you receive may be less than what you paid. At the same time, when the interest rates go down, the value of your bonds goes up. A good way to understand where the interest rate is heading is to follow RBI’s monetary meetings. Before investing in bonds, always check the interest rate trend in the market.

Apart from the above-mentioned points, senior citizen investors must ensure an adequate level of diversification in their investment portfolio. Sometimes the debt income may offer a return which is lower than the prevailing inflation rate. Protection from inflation should be done to avoid a gradual depletion of your corpus in the long term. Senior citizens can make informed decisions when investing in fixed-return instruments and align their investments with their financial objectives and retirement needs.

 

The author is an Independent Financial Journalist

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