About Debt Investments

Investment options that guarantee the principal investment amount under all circumstances come under the category of debt instruments.

The instruments in this category include deposit schemes (bank fixed deposits, post office deposits, company deposits), debt mutual funds, saving schemes (PPF, NSC), liquid funds etc.

Every investor should have a percentage of the investment portfolio in debt-based instruments. Inclusion of debt-based investment instruments provides stability to a portfolio and reduces the overall risk.

However, the percentage allocation towards debt based instruments with respect to other categories of investment instruments should vary and depend on the risk profile of the individual.

The debt-based instruments have gone out of favor due to the good performances of equity markets and tax levied on returns earned from some debt instruments.

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In fact, pure debt-based instruments do not provide returns even to cover the ongoing inflation rate, which means a negative return on a net basis.

However, debt options certainly provide certain features, and that is why they bring value to the table for investors who are looking at parking their money for a short term and for investors looking at low risk avenues.

For short-term investors Investors looking at parking their funds for a short term can go for liquid funds or bank savings account. Liquid funds and savings account are highly liquid and come with low returns.

The introduction of daily interest rate calculation on savings accounts has made them an attractive option for a short term. Returns on these instruments are quite low.

However, they are definitely good options for those looking at parking funds for a short term, with a guarantee on the principal amount as well as some sure returns.

There are various options available for these investors, and one should look at the trade-off between risk, returns and liquidity while making an investment decision.

Small savings schemes: These are government schemes or bank deposits,
and therefore one of the safest investment instruments available in the market.

Bank deposits, Public Provident Funds (PPF), National Savings Certificate (NSC) etc are some examples. Although the returns from these instruments are quite low, they are net of tax and therefore attractive.

However, most of these schemes come with a long lock-in period and are therefore less attractive in terms of liquidity.

Debt-based mutual funds invest in various corporate and government bonds. Debt-based mutual funds offer good returns with a slight variance based on market conditions in the debt or bond markets.

These instruments become more attractive when interest rates tend to go down as long-term bond prices go up when the interest rates go down. On the other hand, bond prices go down when the interest rates go up.

Hybrid products: These are some innovative products introduced recently by investment houses. They are not pure debt-based instruments, but simulate debt instrument conditions based on investments in a mix of equity and derivative options. These instruments promise to guarantee the principal amount but the returns are linked to some equity-based milestones. For example, the Nifty index, returns from top five companies etc.

These products are also based on the derivatives markets. Since these are new products, investors should read the various terms and conditions carefully before committing a large amount.