Fixed Income Investments Vs Market Linked Products
Published On Mar 18, 2022 10:00 AM By InsuranceDekho
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As an investor, one always wishes for the best returns from investments without any risk of losing money. However, it is common knowledge that there doesn't exist any such investment product. In reality, risk and returns are inversely related, i.e. with more risk come higher returns and vice versa.
For investors, the choice between fixed-income investments and market-linked investments becomes more pronounced when it comes to meeting goals. Let's see what they are and how different investment avenues may be put to use while chasing goals.
Interest-bearing investments such as bank fixed deposits, company deposits, post office small savings products and bonds are popular among fixed-income investors. They come with a fixed return and a pre-decided maturity period. They, therefore, belong to the debt-asset class.
The principal amount invested is fairly safe in such products. They, however, fail to generate high real returns, i.e. returns adjusted to inflation are low in such fixed-income investments. For example, if the return generated from them is 7 percent while inflation is 6 percent, the real return will be around 1 per cent. At the most, such instruments help in preserving capital and providing a regular flow of funds to meet monthly household requirements.
When returns depend on the performance of the underlying asset, which could be equity or debt, it is the case of market-linked investment. Returns, therefore, are neither fixed nor assured. Equity shares, mutual funds, Ulips, NPS are all examples of market-linked investments. As they are high-risk products, the potential to generate high returns is also there.
Role of market-linked investments: As fixed income investments generate low real returns, it is imperative for an investor to look at equities.
Market-linked investments, especially those made in equities as the underlying asset class, are more likely to deliver high real returns. For this to happen, the holding period of equity should be long enough to ease out the volatility associated with equity. The more away the goal to be achieved is, the more reliance can be placed on equity-backed investments. Be it one's child education, marriage or one's own retirement, equity plays an important role in creating a decent corpus even with a smaller amount of regular savings.
For an investor chasing long-term goals, it is important to make the best use of both worlds. Both fixed-income and market-linked investments have a role to plan in the process of wealth creation. While market-linked investments help in navigating the volatility and in the process generate high real return, the fixed income investments help in preserving the accumulated wealth so as to meet the desired goal. In times when interest rate is on the down side, choosing between fixed and market-linked investment avenues should not be so difficult.
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Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.