One has to remember that every investment has risk. Risks in some investments are higher and it is lower in some. Fixed Income Investments are investments in FDs, Pension plans, Post Office schemes, Company FDs, etc. Generally, it is assumed that these investments have no risk or very low risk. This is because in most cases, the government appears to guarantee the investment (it actually guarantees only part of the investment).
The negatives of such investments are:
- Low returns with almost no chance of it going higher.
- Except in a some specific cases, the income is taxable since the income is in the form of interest.
- No chance of Capital Appreciation.
- Very real danger to lifestyle in a time when the interest rates are falling – like the present.
- The returns almost never beat inflation, which means in real terms, one is losing money.
In my opinion, the fixed income investments have a place in one’s overall investment mix as follows:
- A PPF account opened in a child’s name, very early, say when the child was less than 10 years old and money was invested in this account every year, would be a great investment for the child’s retirement. The compounding over a period of nearly 50 years would be great and once the child retires, this amount would be available whenever the other investments in stocks, etc, are not doing well.
- Other than the above, the investment in fixed income schemes, should not be more than 5 – 7 years of expenditure. This is just to protect you should the stock market fall or other investments are not doing too well.
- The last and the most important of fixed income investments is when a goal is being reached. Say, one has invested in a Mutual Fund for a child’s higher education and this money is required when the child is 18 years old. Right from around 3 years earlier, some money should be shifted out of the Mutual Fund to Fixed Income Investments so that the money is not at risk and will be available when the child’s education needs it.
By the way, what’s the risk of only investing in Fixed Income Investments? There is a good chance that the money will finish before your life does!