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Finance

Fixed income investments vs. Market linked products – Which one to choose?

Life is full of surprises! Things and circumstances can spring up leaving you irked.

Suppose you earned Rs.1 lakh a month and spent 90k out of it. You are left with just Rs10 k to save. The amount of saving in the long run will not help you meet the future expenses. Man plays his role well as the time demands. But as he grows old, responsibilities expand to grab a clutch of wishes. Every one of us has to sail on this boat once in life that teaches us the need of financial planning. Agreed?

There are different financial products like market linked products and fixed income investments allowing you to put your money aside to grow. The market-linked products like ULIPs is an insurance policy that offer investment options as well as life cover. Apart from this there are other instruments that provide fixed income investments. These schemes are backed by both government and private banks that yield good returns.

While you think of investment there are a few things you must keep in mind. As both the options are safe to put money into, investing in the profitable alternative is better.

Let us first explore what are the two instruments, one by one.

Table of Contents.

What are fixed income investments?

What are market linked products?

Comparison

-Risk Profile

-Returns

-Tax

What are fixed income investments?

Fixed income investment is broadly a type of investment that pays investors a return at fixed interest until its maturity. On maturity of the investment, the investors are repaid the principal amount along with interest.

The approach of buying the fixed income investment is to preserve the capital. The interest oriented investment for the fixed income include bank fixed deposits, post office small savings, and bonds. The fixed income products are issued at a pre-decided rate of return and a set maturity period.

When your requirement is fixed and certain in the near future, you would not want to invest the money in a volatile market. This is how a fixed income investment helps with the sure income. Though these products fail to compensate for rising inflation, these provide a regular flow of funds. For example, the rate of return under the fixed income product is 5% but the inflation is 8%, you are falling short of money by 3%. The product will keep your principal amount protected.

Next let us see more about market linked investment products.

What are market linked products?

Market linked avenues are the products that are governed by market fluctuations. The returns are based on the funds you invest money in. Some examples of market linked products are mutual funds, equity shares, NPS, and ULIPs. Out of these ULIPs are the preferred option of investment. Why?

It is because ULIPs are life insurance policies that provide dual benefits of insurance as well as investment. The part of the premium you pay for ULIP goes for life cover and the other portion goes for investment. These investments are made into equity, debt or combined funds.

Depending on the risk appetite of the investor, the option of investing is chosen. Those who are risk averse and look to protect their investments, should opt for the debt funds. Whereas individuals who expect high returns in a short period of time can pick equity funds.

The market-linked products generate higher returns.

As a potential investor, you may ponder whether adhering to standard savings plans is a smart idea or whether taking prepared risks is a better option. The greatest choice is to have a well-balanced investment portfolio that produces excellent returns over time. Having this type of portfolio allows you to better understand your financial requirements while also protecting your financial interests.

Next, let us see the comparison between the two.

Comparison between Fixed Income Investment and Market Linked Products.

Here is a quick comparison between fixed income investments and market linked products.

Particulars Fixed Income Investment Market Linked Products
Risk Profile The risk probability with the fixed income investment is low as the amount due to receive is pre-defined after a period of time. Market linked products are influenced by market volatility. This entails high risk of returns especially when you invest in equity funds.
Returns The returns under the fixed income investment are guaranteed and informed at the beginning of the period. The market-linked returns give both stable and high returns. The stable returns are assured when the investment is made in debt funds. For high returns, the investments are made in equity funds. If a balanced return is expected, you can put your money in combined funds.
Tax Tax benefit under fixed income investment is eligible under section 80C of Income Tax Act,1961. Tax benefit under market linked products is eligible under section 80C of Income Tax Act,1961.

Next, let us see the recommended products that you can buy for fixed income investment and market linked products.

Preferred investment options:

These are the recommendations for the preferred investment options:

Fixed Income Investments:

  • Public Provident Fund: This is a popular scheme backed by the government. It offers attractive interest rates that are tax exempt. The duration of investment is 15 years  and the investment provides tax benefit under Section 80C.
  • Senior Citizen Savings Scheme: This is a good scheme for investors above 60 years of age, who look for a regular stream of income. The minimum time frame of investment is 5 years. The maximum amount of investment that you can make is 15 lakhs.
  • Sukanya Samriddhi Yojna: The deposit scheme is applicable for the benefit of girl child. The rate of interest offered under the scheme is 8.1%. The minimum amount of deposit allowed under the scheme is INR 1000/-.

Market Linked Products:

  • ULIP: Unit Linked Investment Product is an insurance policy that offers dual benefits. The ULIP provides insurance as well as opportunity for investment. The premium paid under ULIP is divided into two parts. One portion of the premium goes for life cover while the other goes for the investment.
  • National Pension Scheme: National Pension Scheme (NPS) is a government sponsored scheme. The scheme was launched in the year 2004 enabling the subscribers to their pension account.All through their working years, the individuals  can contribute to the pension account. Later, after retirement, the individual can receive the pension.
  • Mutual Funds: Mutual funds is a professionally managed pool of funds which receives investments from several individuals and institutes. The money in the pool is further invested in stocks, bonds, gold, real estate, money market instruments, etc.

Conclusion:

Fixed-income and market-linked assets both have a place in the wealth generation process. While market-linked investments aid in navigating volatility and, as a result, provide high real returns, fixed income investments aid in the preservation of collected wealth in order to achieve the intended aim. Choosing between fixed and market-linked investment choices should not be difficult in periods when interest rates are low. For more information, read here.

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