What belongs here
Every portfolio needs a portion that is not expected to grow spectacularly and is not expected to fall. That is the job of fixed income: to be available, in full, on the date it is needed.
The instruments differ in liquidity, tax treatment and the degree to which the return is genuinely fixed. Choosing among them is mostly a question of when you need the money and what tax bracket you are in.
The options in common use
- Bank fixed deposits — predictable and simple. Interest is taxed at your slab rate each year, whether or not you withdraw it.
- Debt mutual funds — liquid, overnight, ultra-short, short duration and corporate bond schemes, matched to how long the money is being set aside for.
- Small savings schemes — PPF, NSC, Senior Citizens' Savings Scheme, Post Office Monthly Income Scheme and Sukanya Samriddhi, each with its own eligibility and lock-in. Rates are reset by the government every quarter.
- RBI Floating Rate Savings Bonds — a government-backed instrument with a rate that resets periodically and a fixed lock-in.
- Corporate deposits — higher rates, and credit risk that deserves examination rather than assumption.
The emergency fund
Before any of this becomes an investment question it is a liquidity question. A reserve covering several months of household expenses, held where it can be reached within a day and without loss, is what stops a long-term portfolio being broken at the worst possible moment.
A word on inflation
Fixed income protects the amount but not always the purchasing power. Over long periods a return close to inflation, taxed at your slab rate, can leave you slightly worse off in real terms. That is an acceptable price for money needed in two years, and an expensive one for money needed in twenty.