Three Reasons to Invest in Fixed Income Schemes

What are Fixed Income Schemes?

Fixed Income Schemes invest in securities such as bonds, debentures, government securities, money market instruments and other similar instruments. The main purpose of such schemes is to invest is to generate a steady income against a balanced investment risk.

Fixed Income securities carry minimum investment risk as the main motive is to offer the promised returns to the investors. On the other hand equity securities have no such obligation to pay back the investors. Though the promised return is comparatively higher, equity funds have high risk of investment loss. So, conservative investors prefer going with fixed income schemes.

Following are a few schemes that offer investment benefits to investors:

More tax efficient

Fixed Income Schemes are more tax efficient than several other investment instruments. After a year, the invested income is always treated as a long term capital and is taxed at 10% or 20%. If you hold the debt fund for a longer duration or period, then the indexation benefit is higher. For instance, DSPBR Banking & PSU Debt Fund offers extensive tax benefits to investors by heavily investing in debt and money market instruments, which have special tax exemption.

Better returns

The longer the period of investment, higher are the returns. Funds that invest in long term bonds are not applicable to changes in rate which occur in short-term debt funds’ investments. For instance, DSPBR Government Securities Fund has a longer lock-in period and directly invests in GOI bonds. As lock-in period is longer, it offers better returns as compared to other short term funds.

More flexible

Fixed Income Schemes are more flexible than others and a person can invest small amounts in them every month. Certain schemes primarily invest in money market instruments that offer combined benefit of liquidity and growth. For instance, DSPBR Money Manager Fund has a portfolio of money market instruments that offer better gains than regular debt instruments.

Everything about Fixed Maturity Plan

Fixed maturity plan (FMP) are on the same lines that of a fixed deposits of a bank. However, they come with a slight difference. FMPs are debt schemes that invest in fixed-income securities. 

• Where do FMPs invest?

The corpus invested in Fixed Maturity Plans is directed into many avenues such as certificate of deposits (CDs), commercial papers (CPs), money market instruments, corporate bonds and sometimes even in bank fixed deposits. The fund manager invests into the above mentioned avenues based on the tenure of the investment. Say if the FMP is for a year, then the fund manager invests in paper maturing in one year. The expense ratio generally varies from 0.25 to 1 per cent.

• Tenure of FMPs

 The tenure of the plan depends on the plan and its maturity period. It can range anything from one month to three years. They are closed-ended in nature, which means that once the NFO (new fund offer) closes, the scheme cannot accept any further investment.

These FMP NFOs are generally open for 2 to 3 days and are marketed to corporates and well-heeled, high net-worth individuals. Nevertheless, the minimum investment is usually Rs 5,000 and so a retail investor can comfortably invest too.

• Actual return Vs Indicated Return

When compared to bank fixed deposits, the actual return tends to differ slightly from that of the indicated return. As banks print the exact amount expected on the maturity of the plan on the FD receipt. 

• Tax Implications

• The dividends are exempted from tax in the hands of an individual investor.

• If the growth in FMP is less than one year, then the returns are combined with         income and taxed accordingly.

• If the investment in the growth option of the FMP is for over a year, than either 10% capital gains tax without indexation or 20% with indexation.