Understanding more on Debt Instrument
With a debt instrument, you are providing a loan to the entity. In other words, you become the holder of the debt instrument. The entity is bound to pay you the principal amount along with accumulated interest at certain time as specified in the instrument.
We often borrow money as personal loan or a home loan. But have you ever thought of becoming a lender to the companies or government? It is possible. You can earn interest on the money lent by you. All you need is to invest in debt instruments. These instruments provide higher returns and are considerably tax-efficient. We will discuss some of the significant types of debt instruments.
Gilt funds
These funds are issues by the government, including Central Bank and the State Governments. As these are issued by the government itself, they do not carry any kind of risk. But please note that interest rates affect this kind of funds in substantial way. Investors who have the ability to face large risks and are looking out for larger profits out of it can grab these debt instruments. The time required to invest in these funds is from one year to two years.
Short-term funds
These are in the form of Commercial Paper, Certificate of Deposit, and bonds. You may receive consistent returns from these instruments as these are not affected by the changes in interest rates. As compared to liquid funds, these funds provide higher returns. If you desire to lock-in your surplus money for a short period and want to earn higher returns, then you can surely go for this investment option. The time range of these instruments is only between 6 to 12 months.
Income funds
In these funds, certain debt instruments are included such as debentures, bonds of long-term duration and government securities. You have the maximum flexibility to invest in instruments of varying durations such as 1 year to up to 20 years. It is up to your discretion for how long do you want to invest funds. These funds provide returns according to the changes in interest rates and hence, these can be aggressive for the investor. If you are looking for a long-term investment and can manage risks, then go for this. It depends on you how do you want to invest in the overall rate cycle for obtaining higher returns.
Fixed Maturity Plans
The prime advantage of these plans is that they are not influenced by the interest rate fluctuations since these are for a fixed period of time. If you are not willing to take risks and want to lock-in your money for a fixed period of time, then there is no other best option than fixed maturity plans. You can select the time zone as per your convenience. For instance, if you want higher returns, then invest for three to five years. You may also invest for even three to six months if you want quick returns.
Liquid funds
These funds like Treasury bills and Commercial Papers are the most stable debt instruments. The liquidity of these funds can be compared with that of a savings bank account. Surprisingly, you can invest in liquid funds for a few days.
Thus, you can invest in debt instruments as per your investment objective and acquire the benefit of good returns.
Debt instruments are very secured form of savings with a high rate of interest. They are secured because they are issued by the Goverment like the Gilt funds. While the short term funds give a higher rate ofreturns. The income fund might be risky because the rate of interest fluctuates. But the fixed maturity plans have the interest rate stable. The liquid funds is often compared to the bank savings but the tenure might be short.
This was a new one for me as I am quite unfamiliar with financial terms. its good to know that we can be lenders to the government and earn interest from them in the form of Gilt funds, Short term funds, fixed maturity plans and liquid funds. In my opinion, liquid funds look to be the best deal as they can be invested in for a few days also and the interest rates are also higher. I will definitely have a look into this.
Very interesting article, providing with some very informative explanations. It truly enhances one´s perspective and makes you start thinking there are also other possibilities than just money in the bank. You can use a lot of different offers in order to obtain some extra money. All you have to have is some extra money on your account that you can miss in everyday life.