How you can make money from fixed-income instruments

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Who doesn’t like the opportunity to make an extra penny or two outside their regular income? From working extra hours to investing in different avenues, people try every possible option to have an additional income.

While investing in stocks and equity-oriented saving instruments might come with promising returns, there is risk associated with it. Fixed-income instruments, on the other hand, come with guaranteed returns, attracting risk-averse investors.

Let’s look at the popular fixed-income investments:

Fixed deposits

Fixed Deposits (FDs) are the most popular fixed-income generating investment avenue. You can invest an amount as low as Rs.500 for a period starting from seven days to ten years. The depositor can decide on the tenure and the amount depending on his/her needs.

Fixed Deposits are usually of two kinds, Bank Fixed Deposits and Company Deposits. Fixed deposits placed by investors with companies for a fixed tenure at a pre-determined rate are called Company Deposits and they work similarly to Bank Fixed Deposits.

Bank Fixed Deposits are popularly known as FDs and Company Deposits as CDs. Company deposits usually offer a higher rate of interest than banks but their CRISIL ratings are usually lower.

Currently, the interest rate on FDs range from 5.5 per cent to 8.5 per cent. FDs can help you save taxes on deposits for five years and more.

Recurring deposits

If you want to invest in small portions in a regular manner, you can opt to invest in recurring deposits, wherein you can deposit small amounts every month for a fixed duration. You can decide on the amount and tenure based on your affordability and requirement. The interest rate ranges from 4 per cent to 8 per cent. You get a lump sum amount on maturity along with the accumulated interest.

Bonds

Bonds issued by the Government and large companies can be bought by paying a lump sum amount. These instruments have a fixed tenure and a fixed rate of interest associated.

Fixed Maturity Plans or FMPs

FMPs are close ended debt mutual funds with a pre-determined tenure and rate of return. The mutual fund invests in instruments whose duration is similar to its own or a little less. Thus, a 1111 day FMP will invest in papers with an average maturity of 1110 or slightly less. Since FMPs are close ended, they seldom have redemption pressures before maturity.

Post Office Monthly Income Schemes

The Monthly Income Scheme offered by the post office is a five-year scheme. It is similar to a recurring deposit scheme and the investments are made on a monthly basis. The minimum monthly investment required is Rs.1500. The interest rate associated is 7.6 per cent per annum.

Making money through these fixed-income investment schemes

Though the above list is not exhaustive, it outlines the popular investment choices for guaranteed returns and tax saving. Although the interest is not very high, it is fixed and guaranteed through the duration of investment. Many of these instruments provide tax-free returns. While some come with tax exemption on investment and interest earned, some ensure tax relief on the maturity proceeds. Thus, these investments lower your taxable income, subsequently lowering your tax liability and helping in saving money.

Things to remember

While fixed-income earning investments help you make money, there are certain things which you should keep in mind. These include the following:

  • You should invest regularly and in a disciplined manner if you want to make money from fixed-income investments. Investing should not be a one-time affair. You should review and invest periodically for better income opportunities.
  • Do not shirk away from these investment avenues only because their interest rate is low. The guarantee of returns is important too. Moreover, your financial portfolio should be balanced and these investment opportunities help you achieve this balance.

Understand the tenure, the interest rate and the tax treatment of any instrument you are investing into so that you do not get any nasty surprises on maturity.

Making money from fixed-income instruments is easy if you invest in a disciplined manner. However, you must pick your assets carefully and review your investments on a regular basis.

[“Source-timesofindia”]