Mention your investment portfolio, and many people jump to the conclusion that you hold an array of stocks. But savvy investors know that equities aren't everything. The key to developing a sound portfolio is striking the right balance between potential reward, risk, and your future financial needs. Fixed-income securities can be an excellent way to diversify your portfolio. They are also crucial for your tax planning.

Fixed-income securities represent the debt of domestic financial institutions, companies, banks, and government issues. In essence, when you buy a fixed-income security, you are lending money to the issuer for a specified period of time. In return, you expect the issuer to make regular interest payments (annually, semi-annually, quarterly, or monthly) and to pay back the face amount on the maturity date (the end of the specified period for the loan).

Fixed-income instruments in India typically include company bonds, fixed deposits and government schemes. One of the key benefits of fixed-income instruments is low risk i.e. the relative safety of principal and a predictable rate of return (yield). If your risk tolerance level is low, fixed-income investments might suit your investment needs better.

Most fixed-income securities offer a relatively stable and predictable income flow. The amount of interest the issuer has agreed to pay, the coupon rate, is set at issuance and remains the same until maturity: hence, the term "fixed income." The different fixed-income vehicles in the market allow you to choose from a range of credit ratings and maturities. Fixed-income securities provide the flexibility to structure a portfolio tailored to your specific investment objectives and tolerance for risk.

• Most fixed-income securities offer a relatively safe and predictable income flow.
• The coupon (the amount of interest the issuer has agreed to pay) is set at issuance and remains the same until maturity; thus, the term "fixed-income."
• The different fixed-income vehicles in the market allow you to choose from a range of credit ratings and maturities (generally one day to 30 years, with some as long as 100 years). This diversity helps improve your management of risk.
• Fixed-income securities provide the flexibility and liquidity needed to structure a portfolio tailored to your specific investment objective.

As with stocks, there are essentially two ways to make money from bonds:
(1) Capital gains, which are achieved by selling a bond for more than it cost to buy, and
(2) The receipt of periodic interest payments. Corporate bonds historically have been viewed as safer than stocks.
 

A portion of your investments should be in fixed-income securities based on your risk tolerance and risk capacity levels. The money that you are likely to need in the short-term should be invested in fixed-income instruments. If you need a certain predictable stream of income, fixed-income instruments are recommended.

While evaluating Best Government Schemes, we consider only two of the three important factors for analysing investment opportunities - returns and liquidity. The third factor - risk - is not relevant and the risk of all government securities is the same. As per our analysis, the best government schemes evaluated on returns and liquidity are - 1. Returns: Public Provident Fund (PPF) 2. Liquidity: Post Office Monthly Income Scheme A brief description of both these schemes is given below.

1. Public Provident Fund (PPF)

Best fixed-income investment for high tax payers PPF is a very attractive fixed income investment for small investors primarily because of

An 8% post-tax return - effective pre-tax rate of 11.43%+ assuming a 30% tax rate

A tax-deduction - from your taxable income for the year, subject to a maximum Rs 70,000 for a tax deduction

Low risk - risk attached is Government risk

So, what's the catch? Lack of liquidity is a big negative. You can withdraw your investment made in Year 1 only in Year 7 (although there are some loan options that begin earlier). If you are willing to live with poor liquidity, you should invest as much as you can in this scheme before looking for other fixed income investment options.

2. Post Office Monthly Income Scheme

Offers regular income, no TDS The monthly income scheme offers 8% monthly interest and a 10% bonus if you hold your investment for the entire term of 6 years. This scheme is best suited for retired individuals or individuals who have regular income needs. Besides the low (Government) risk, the fact that there is no tax deducted at source (TDS) in this scheme is another attractive feature. Public Provident Fund Tax-free interest, highest post-tax fixed-income yield for individuals in high tax bracket.   Annual rate of Interest 8.0% Periodicity of interest payment Compounded annually Maturity period 15 years Minimum Investment Amount Rs500 per annum Maximum Investment Amount Rs70,000 per annum Investment in multiples of Rs100 Post Office Recurring Deposits Scheme Recurring Deposit Scheme   Annual rate of Interest 8.0% Periodicity of interest payment Compounded quarterly Maturity period 5 years Minimum Investment Amount Rs10 per month Maximum Investment Amount No limit Investment in multiples of Rs5 Post Office Monthly Income Scheme Monthly Income Interest rate of 8% per annum payable monthly. Maturity period is 6 years. Minimum investment amount is Rs.1000/- or in multiple thereof. Maximum amount is Rs. 3 lacs in single account and Rs. 6 lacs in a joint account. Account can be opened by an individual, two/three adults jointly and a minor through a guardian. A minor having attained 10 years of age can open an account in his/her own name directly. Non-Resident Indian / HUF cannot open the Account. Minor has a separate limit of investment of Rs. 3 lacs and the same is not clubbed with the limit of guardian. A separate account is opened for each deposit. Any number of accounts can be opened subject to the maximum prescribed limit. Facility of automatic credit of monthly interest to saving account if accounts are at the same post office. Facility of premature closure of account after one year @ 3.50% discount. No deduction of 3.5% if account is closed on completion of three years. Facility of reinvestment on maturity of an account. Interest not with-drawn does not carry any interest. Maturity proceeds not drawn are eligible to saving account interest rate for a maximum period of two years. Account is transferable from one post office to any Post office in India free of cost. Nomination facility available. Rebate under section 80 C not admissible. Interest income is taxable, but no TDS Only scheme in Post office where monthly interest is payable. Most suitable scheme for senior citizens and for those who need regular monthly income. Deposits are exempt from Wealth Tax                                                                                                                                                     Source: icicidirect.com,moneycontrol.com,indian Postoffice