Fixed-income investments: Look beyond returns, weigh credit risk, lock-ins

Ladder investments across tenures to manage reinvestment risk, maintain liquidity, and balance returns amid falling interest rates and limited fixed-income options

Interest rates in the Indian economy are on a downward trajectory. The Reserve Bank of India (RBI) paused rate cuts for a second time last week, providing relief to fixed-income investors. Rates on bank and company fixed deposits (FDs) have fallen since the start of calendar year (CY) 2025.

 

The RBI has already reduced the repo rate by 100 basis points this year. “One last rate cut of 25 basis points (bps) is possible owing to the downward revision in inflation projections and the RBI governor’s statement that this opens up space for further policy action,” says Joydeep Sen, corporate trainer (debt) and author.

 

Fixed deposit options

 

Due to benign inflation, real interest rates (nominal interest rate minus inflation rate) are attractive. For conservative investors in lower income-tax brackets, medium- to long-term bank FDs remain a safe choice. Those willing to take slightly higher credit risk may consider company FDs or small finance bank FDs.

 

“Bank FDs are a conservative choice that allows for capital safety, but their yields are quite modest. Company FDs can provide higher returns, but they carry both credit and liquidity risk. Hence, we recommend limiting exposure to top-rated company FDs to not more than 10–15 per cent of the portfolio. Investors should evaluate factors like credit ratings, financials, repayment history, and sectoral diversification before committing,” says Swapnil Aggarwal, director, VSRK Capital.

 

Bank deposits enjoy additional protection through Deposit Insurance and Credit Guarantee Corporation (DICGC) cover of up to ₹5 lakh per investor — a benefit unavailable in company FDs.

 

“Investors should consider diversifying across both bank FDs and company deposits,” says Pankaj Mathpal, managing director, Optima Money Managers.

 

Small savings advantage

 

On September 30, 2025, the government left interest rates on small savings schemes (SSS) unchanged. These remain attractive for conservative investors due to their higher yields and low credit risk.

 

“Schemes like Public Provident Fund (PPF, 7.1 per cent return, tax-free) and Sukanya Samriddhi Yojana (SSY, 8.2 per cent return, tax-free) offer stable and predictable returns along with tax benefits under Section 80C, which makes them highly suitable for long-term goals like retirement or children’s education. However, their lock-in periods limit liquidity. They should be used as cornerstone instruments within long-term portfolios rather than for short-term needs,” says Aggarwal.

 

Rates locked in at the time of opening bank FDs, fixed-rate bonds, and instruments such as National Savings Certificate (NSC, 7.7 per cent return, taxable) and Senior Citizens Savings Scheme (SCSS, 8.2 per cent, taxable) stay constant till maturity. However, the returns on PPF and SSY can change with quarterly reviews.

 

Investors should ladder their investments across one-, two-, three- and five-year maturities to manage liquidity and reinvestment risk better.

 

Mutual fund opportunities

 

Investors in higher income-tax brackets may find arbitrage plus debt fund-of-funds (FoFs) useful for steady income. Gains on investments held for more than two years are taxed at 12.5 per cent.

 

“Investors seeking stability and regular income can consider equity savings funds, income plus arbitrage FoFs, or conservative hybrid funds for systematic withdrawal plans (SWPs). These offer a balance of safety and modest growth,” says Mathpal.

 

In a low-rate environment, short- to medium-duration funds limit interest rate sensitivity while offering stable returns. Dynamic bond and accrual funds focusing on AA+ and above instruments balance yield and safety. For portfolio stability, blending high-quality debt, hybrid, and multi-asset funds helps cushion volatility and diversify income.

 

A systematic withdrawal plan (SWP) can be set up to meet regular expenses. “SWP is a useful strategy for liquidity flows and is highly recommended,” says Sen. 

   

The writer is a Gurugram-based independent journalist.