1. An income can be fixed or variable.
2. Fixed income instruments are supposed to give periodic (regular) income (returns) with eventual return of principal at maturity, within a specified time frame, common ones being government bonds, bank deposits, secured loans and government annuities.
4. However, other "fixed income" products aren't really so, including debt funds (liquid funds are debt funds too), as they don't meet all the above criteria, although they "aim" to protect the capital as well as "try" to generate positive returns too.
5. Such products may "suffer" from "investment risk", i.e. probability of getting back less than what is invested, or getting lesser returns than expected.
6. These risks are:-
a) Interest rate risk - when trading them in secondary market.
b) Liquidity risk - when market transactions get hampered.
c) Reinvestment risk - when returns reduce on reinvesting.
d) Inflation risk - when value of the returns reduces with time.
e) Credit/default risk - upon delays in getting returns / principal.
f) Downgrade risk - by credit rating agencies for various reasons.
7. Interest and short-term capital gains earned from these products are included in income for taxation at slab rate.
8. Long-term capital gains earned on bonds redeemed after 1 year are taxed at 10%.
9. Long-term capital gains earned on debt funds redeemed after 3 years are taxed at 20% after availing indexation benefits.
10. There is no TDS in debt funds, so no need to submit Form 15H or 15G like in FDs, and tax is deferred indefinitely till redemption, while interest income of FDs is taxed on an annual basis, irrespective of its maturity.
11. Beyond 3 years, debt funds enjoy indexation benefits that FDs don't.
12. Debt funds have "investment risks", but when tenure is least, risk and return both are lowest, and as it increases, then risk and return tend to become higher too.
13. Basically, these funds are ideal for parking short term surplus money, to earn a daily interest income, based on market rates, providing an efficient vehicle for short-term investments, instead of letting it remain idle in a savings bank account, earning only a pittance.
14. For medium and long durations, one has to decide based on his risk profile.
2. Fixed income instruments are supposed to give periodic (regular) income (returns) with eventual return of principal at maturity, within a specified time frame, common ones being government bonds, bank deposits, secured loans and government annuities.
4. However, other "fixed income" products aren't really so, including debt funds (liquid funds are debt funds too), as they don't meet all the above criteria, although they "aim" to protect the capital as well as "try" to generate positive returns too.
5. Such products may "suffer" from "investment risk", i.e. probability of getting back less than what is invested, or getting lesser returns than expected.
6. These risks are:-
a) Interest rate risk - when trading them in secondary market.
b) Liquidity risk - when market transactions get hampered.
c) Reinvestment risk - when returns reduce on reinvesting.
d) Inflation risk - when value of the returns reduces with time.
e) Credit/default risk - upon delays in getting returns / principal.
f) Downgrade risk - by credit rating agencies for various reasons.
7. Interest and short-term capital gains earned from these products are included in income for taxation at slab rate.
8. Long-term capital gains earned on bonds redeemed after 1 year are taxed at 10%.
9. Long-term capital gains earned on debt funds redeemed after 3 years are taxed at 20% after availing indexation benefits.
10. There is no TDS in debt funds, so no need to submit Form 15H or 15G like in FDs, and tax is deferred indefinitely till redemption, while interest income of FDs is taxed on an annual basis, irrespective of its maturity.
11. Beyond 3 years, debt funds enjoy indexation benefits that FDs don't.
12. Debt funds have "investment risks", but when tenure is least, risk and return both are lowest, and as it increases, then risk and return tend to become higher too.
13. Basically, these funds are ideal for parking short term surplus money, to earn a daily interest income, based on market rates, providing an efficient vehicle for short-term investments, instead of letting it remain idle in a savings bank account, earning only a pittance.
14. For medium and long durations, one has to decide based on his risk profile.