Who Should Not Invest in Fixed Income Investment Options

Investing in financial instruments that offer a fixed rate of return is a popular way to save money. After all, no risk to capital and income is known and guaranteed until the end of the vesting period. There are many fixed income investment options such as fixed deposits and small savings programs at post offices which are already popular with many investors. Since these investments provide a fixed return, they are more suitable for capital preservation than for raising capital.

If you are looking to invest your money, here are some situations in which investing in fixed income investment options may not suit you to achieve your goals.

If you want to make a long-term fortune

Fixed income schemes come with a guaranteed return that is generally on the lower side. NSC, fixed deposit and other schemes offer low returns. Unless you invest in instruments with returns that can beat inflation in the long run, it may not be possible to build wealth to meet long-term goals. Use fixed income investment options to preserve capital and use market-linked investments such as mutual funds and debt funds to grow your money over the long term.

If your goals will not be achieved soon

If your goals or need for funds are close, it is safe to park the money in fixed income investment options. Otherwise, if the goals are far away, stocks as an asset class have shown the potential to outperform in the long term. the

If you want to generate high inflation returns

Long-term wealth arises when you are able to achieve a higher return from inflation. If inflation is hovering around 5-7 percent, you need to achieve a return at least a few percentage points higher than inflation to build wealth. Fixed income investment options do not have the ability to do this because they are debt assets.

If you want high effective tax returns

Most of the fixed income investment options such as NSC, KVP and fixed deposits provide a fixed return but the entire income is taxable in the hands of the investor. So, if you’re in the top 30 percent tax bracket, roughly one-third of your income is taxable. In order to generate higher tax returns, you need to invest in stocks as only 10 per cent of tax is levied on gains over 1 lakh rupees per year.

If you want to cash your money

Most fixed income investment options come with a lock-in period, and therefore, liquidity is a major concern in them. A better alternative may be to deposit money into debt funds that provide liquidity with highly efficient tax returns as well.