Top Debt Investment Options in India

Debt funds or debt securities are an excellent way to diversify and expand your portfolio. Debt investment options, commonly referred to as debt funds, are fixed-income securities and entail different options, such as corporate & government bonds, debentures, private & public funds, mutual funds, and the like. Less risky and more liquid than equity investments, there’s no better time to invest in debt investment options than now.

Yubi’s investment experts (we don’t offer investment advisory) offer a concise overview of some of the best debt investment options in the Indian money market in 2022.

  1. Corporate Fixed Deposits: Unlike bank fixed deposits, non-banking financials and private business entities offer corporate FDs. In addition, they come with a specific maturity period and offer a fixed interest rate, often higher than banks. Investors must, however, pay close attention to the credit risk ratings before investing.
  2. Non-Convertible Debentures (NCD): Non-convertible debentures are akin to corporate bonds, and companies use them to raise funds in the long run. NCDs behave similarly to corporate bonds, offering fixed interest rates and fixed tenures. However, unlike their convertible counterparts, non-convertible debentures cannot be changed into equity shares on maturity.
  3. Debt Mutual Funds: Debt mutual funds are a sub-category of mutual funds. They are fixed-income instruments, and if you choose to invest in them, then fund managers will invest your money primarily in G-Sec bonds, municipal bonds, NCDs, corporate bonds, and similar financial instruments. A safer alternative for debt investorsdebt mutual funds are best suited for those with a low-risk appetite.
  4. Market-linked Debentures (MLD): Market-linked debentures are complicated money market instruments. They are not fixed-income securities per se. They do not guarantee a payout, and returns are linked to the behaviour of a market index, such as the debenture’s market price, etc. These debt funds can have different underlying instruments and be principal-protected or unprotected. Principal-protected MLDs assure investors of regaining the capital, irrespective of market volatility. Unprotected MLDs have higher payouts but do not guarantee anything if market indices suffer.
  5. Unit Linked Insurance Plan (ULIP): An excellent avenue to obtain long-term capital gains, ULIPs offer dual benefits of investment and insurance. ULIPs merge life insurance policies with low-risk investment options. Unit-linked insurance plans from prominent financial institutions have near-zero default risk and are buffered against significant market risks. As a result, you get insurance coverage and reap benefits from the money market, making ULIPs one of the best debt investments to diversify one’s investment portfolio.
  6. Public Provident Fund (PPF): The PPF scheme is among India’s most common debt funds. Ideal for conservative investors, the Public Provident Fund scheme is somewhat akin to pension schemes and belongs to a class of non-market-linked government securities. PPFs guarantee returns at a rate of 7.1% per annum, have a minimum tenure of 15 years and come with minimal risk.
  7. National Pension Scheme (NPS): This is a market-linked retirement benefits scheme under the Central Government’s Pension Fund Regulatory & Development Authority. Available to all Indian citizens between 18-60, it is a voluntary social security initiative that offers several benefits such as tax exemptions, higher returns of 9% to 12 % per annum, and minimal risks.
  8. Senior Citizen Savings Scheme: This is a money market fund for Indian citizens above 60. It is a government-backed scheme and assures a regular income to senior citizens after retirement. SCSS offers a fixed income stream quarterly.
  9. Direct Equity: Direct equity investments are high-risk investments. You own shares of the company you invest in and receive payments from dividends from profits & stock-price appreciation directly from the stock market. If markets become volatile and share prices go down, you stand to lose a lot.
  10. Real Estate Investment: Real estate investments encompass the purchase, sale or rental of real estate. Real estates are the largest asset class in the global economy and come with substantial risks due to political interference, adverse laws, corruption, and the like.
  11. RBI Bonds: Launched in 2020 by the Central Government, RBI bonds are floating-rate savings. Indian citizens can invest in these debt instruments, with a minimum face value of Rs. 1000 and a maturity period of seven years.
  12. Gold ETF: Gold exchange-traded funds invest in gold bullion. These are passive investment instruments and are used to track gold prices. Gold ETFs are backed by physical gold and come with the dual benefits of flexible stock investments and simple gold investments.
  13. Pradhan Mantri Vaya Vandana Yojana (PMVVY): This is another pension scheme from the Indian Government for senior citizens. The PMVVY offers a 7.4% monthly interest rate and a policy term of 10 years.
  14. Post Office Monthly Income Scheme: Post Office MIS is a popular low-risk debt investment scheme offered by the Indian Post Office. It provides an annual return of 6.7%, comes with minimum risk, allows investors to have joint accounts, has a lock-in period of 5 years, and is transferrable across PO branches.
  15. Initial Public Offerings: Investing in IPOs comes with high risks. They are offered by companies selling their shares to the public for the first time and come with risks such as over-subscription, undervalued shares, volatile share prices, and bankruptcy.

Types of Investment Options

Low-risk investments

Here are some of the best low-risk investment options in India:

Bank fixed deposits and corporate fixed deposits

  • Public Provident Funds
  • Debt mutual funds
  • National Pension Schemes
  • G-Sec Bonds
  • Municipal Bonds
  • Government treasury bills
  • Certificate of deposit from central & private commercial banks

Medium-risk investments

Popular medium-risk investments to include in your investment strategy include:

  • Debt funds
  • Dividend-based stock investments
  • Balanced mutual funds
  • ETFs such as Gold ETFs
  • Corporate bonds

High-risk investments

If you have a high-risk appetite and want high capital gains, then

  • Direct equities
  • Real estate investments
  • Options trading
  • Foreign exchanges
  • Cryptocurrency
  • Hedge Funds

Equity mutual funds

Investment decisions must be taken with extreme care, time, and clear thinking. Weigh all your options. Think deeply about your income & expenses, make sure you have enough saved for contingencies and emergencies, and then take the next step.

With that in mind, here are two lists of convenient debt fundsmoney market instruments, and debt securities for short-term & mid-term investment horizons.

Best Investment Plan For 1 Year

Enhance your investment strategy and portfolio with the following short-term investment plans:

  • Fixed Maturity Plans: These debt mutual funds come with pre-defined maturity periods and offer a predictable rate of return. In addition, debt funds such as fixed maturity plans have fixed income instruments, bonds or certificates of deposits as underlying assets. As a result, they have short maturity periods, making them immune to market risks.
  • Debt Mutual Funds: Debt mutual funds invest in corporate, government, and similar debt instruments. They are safer and offer better liquidity than direct debt investments.
  • Post-office Term Deposits: Post Office term deposits are safe, transferrable, offer fixed returns, and can be withdrawn within a year.
  • Arbitrage Mutual Funds: Arbitrage Mutual Funds generate risk-free returns by selling a specific underlying asset in different capital market segments. As a result, these schemes come with relatively low-risk profiles.
  • Recurring Deposits: Recurring Deposits are popular among conservative investors in India. Open an RD account to meet your short-term financial goals.
  • Fixed Deposits: fixed deposit in a major commercial bank is one of India’s safest short-term investment options. Benefits include guaranteed interest payment, near-zero risks, and the option to reinvest after maturity.

Best Investment Plans for 5 years

  • Liquid Funds: These mutual funds invest in government securities and bank certificates of deposit. They are low-risk investments and yield decent interest rates of 8%.
  • Savings Account: The most straightforward way to get some return on your savings, savings accounts are India’s most basic investment option. Private banks offer account holders as much as 6 to 7% returns per annum.
  • Post-Office Time Deposits: Indian Post Office’s Time Deposit Scheme offers a fixed interest rate of 6.5% p.a. for schemes with a five-year maturity, offers income tax benefits, and allows premature withdrawal and transferability. Time Deposit schemes are another extremely secure option for low-risk investors.
  • Large Cap Mutual Fund: These mutual funds invest in renowned companies with large market capitalisation. If you have the money, then investing in this type of debt mutual fund guarantees stable returns in the long run.
  • Stock Market/Derivatives: Before trading or investing, you need to thoroughly understand the underlying assets, their structure, and market behaviour. Derivatives derive their value from fluctuations in the price or value of underlying assets, such as stocks, interest rates, commodity prices, and the like. As a result, stock market derivatives are one of the most complicated and risky financial instruments.

Understanding The Relationship Between Interest rates and The Value of Debt Investment

Values and prices of debt instruments are inversely related to interest rates. When market rates fall, selling prices rise as the coupon rates associated with debt security remain high.

The converse happens when rates go up. So, if the RBI hikes interest rates, new bonds will be issued at that high rate, making existing bonds with lower coupon rates less valuable. Their selling prices are thus brought down to make them attractive.

How To Invest During an Interest Rate Hike? 

Investing in short-term mutual funds and debt instruments is the best option to reap profits from sudden interest rate hikes. Liquid funds, short-term mutual funds & debt instruments, and investing in smart investment plans (SIP) are some sensible investment options during an interest rate hike.