Investment Risks of Fixed Income; Know What Are Examples | There are risks in fixed investment also, these are three risks that can give you losses in many ways

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Mumbai6 hours ago

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  • If we invest in mutual funds for 3 or more years, the tax benefit is higher.
  • Each scheme in a mutual fund invests in roughly more than 50 bonds, so that if any 1 bond defaults, then the rest is reduced over all impact.

It is generally believed that a debt-fixed investment cannot yield losses. but it’s not like that. Whenever you invest money in a fixed investment in which you think there will be a fixed return, there is a loss. We are telling you the three risks that may bother you.

Default prone

There is a risk in investing. You may not get the interest paid or you may not get your capital back. Fixed deposits, RBI bonds, public provident fund PPF may not typically carry this risk but are in corporate FDs.

Interest rate risk

If the interest rates go up or down after your investment, your investment may be risked. Imagine that you now invest in a bank FD for 5 years at a rate of 5%. After one year the interest rates go up. But you will still continue to receive the same 5% returns, not an increased rate. This is also a type of risk.

Risk of investment in FD

Suppose you invest in FD at a peak of 8% per cent for one year and after 1 year when you get maturity and invest it again, you will get interest only at 8% on the new FD. This is called reinvestment or reinvestment risk. FD, RBI bonds, PPF carry this risk.

No time for money

This risk occurs when you do not receive money on time. Suppose that if you invest in PPF. Its lock-in is 15 years old. If you invest in a bank FD for 5 years and try to withdraw before 5 years, you will have to pay the fine. Again, FD, RBI bonds, PPF all have this risk.

So what should investors do?

Investors have to first decide what risk they are willing to take. Every investment will have some risk.

Hazardous products

Fixed Deposit –Interest rate risk and liquidity risk

Corporate deposit – Liquidity and interest rate risk

mutual fund – In this all 3 risks can be managed well. Provided that you have chosen the right scheme based on your requirement. There is nothing fixed in fixed income and everything is risk. You have to decide what risk you are comfortable with and how do you assess risk? How do you handle it?

Adopt asset allocation

This is to say that investors should follow an asset allocation. Suppose one is a conservative investor and invests 80% in debt and 20% in equity. The point is not to invest 80% of all debt in a single product. Divide 80% into 3 different portfolios.

Liquid portfolio

This is such a portfolio, you get money whenever needed. 10% of your debt portfolio can be invested here.

Core debt portfolio – This portfolio is the main portfolio investment. 70% of your debt portfolio can be invested here depending on your need in terms of risk and return.

Mutual fund risk reduced, returns better

Mutual funds are able to offer a better risk-adjusted return. Of course we can argue Franklin’s case here, but this is not usually the case.

Liquidity in mutual funds

You get money from trading in mutual funds in two days.

Interest rate risk- There are many schemes to choose from, but only those that can be controlled

By defaultEach scheme invests roughly in more than 50 bonds, so that if one of the bonds defaults, then the rest is reduced all over.

Tax If we invest for 3 or more years, the tax benefit is higher. If one invests in FD at the rate of 6% in the 30% tax bracket, the return after tax will be 4.2%. But if a mutual fund gets 6% return and the inflation rate is 5%, then the mutual fund is taxed at 20%. So net return is 6% – 0.2% = 5.8% while FD gets 4.2%.

What advice can be given to a senior citizen right now?

Senior citizens can invest in two schemes. There is a Senior Citizen Saving Scheme on which 7.4% interest is being received. The second LIC is the Pradhan Mantri Vaya Vandan Yojana (PMVVY) scheme. It is also getting 7.4% interest.

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