Beyond FDs: How to build a diversified fixed-income portfolio

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• Fixed deposits offer certainty but limit flexibility and returns
• Debt funds and bonds add flexibility and diversification
• Mixing FDs, debt funds, and bonds creates a balanced portfolio

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For many investors, fixed income and fixed deposits almost mean the same thing. When people want safety in their portfolio, the easiest decision is to open another FD. It feels familiar, simple and predictable.

But a fixed-income portfolio does not have to rely on just one product. In fact, putting all your fixed-income money into FDs can quietly limit your options.

Fixed deposits can still be the base of your portfolio. They offer certainty because you know exactly how much interest you will earn and when you will get the money back. For money that you might need in the next year or two, FDs work well because they are stable and easy to manage.

The issue starts when all the money meant for the safe part of your portfolio is placed only in FDs. When that happens, you may miss out on other options that can offer better flexibility or sometimes slightly better returns.

Debt mutual funds are often the first step investors take when they move beyond fixed deposits. These funds collect money from many investors and invest it in loans or bonds issued by governments, banks and companies. In simple terms, you are still lending money and earning interest, but it is done through a professionally managed fund.

Some types of debt funds, such as liquid funds or short-duration funds, are commonly used for relatively stable returns while still allowing easy access to the money. They are often used by investors who want a place to park money without locking it away for a long period.

This is where they differ from fixed deposits. With an FD, your money is locked in for a specific time unless you break it early. Debt funds usually allow you to withdraw the money whenever you need it, which makes them more flexible.

Government bonds are another option that can be part of a fixed-income portfolio. When you buy a government bond, you are essentially lending money to the government and earning interest in return.

Because these bonds are issued by the government, they are considered among the safest fixed-income investments. Some investors keep a portion of their money in government bonds simply because they add stability to the portfolio.

In recent years, it has also become easier for individual investors to buy these bonds. Through the RBI’s retail direct platform, investors can purchase government securities directly instead of going through banks or brokers.

Corporate bonds are another category to consider. These are bonds issued by companies that want to borrow money from investors. In return, they usually offer a slightly higher interest rate than government bonds.

However, this is where investors need to be careful. Higher interest rates can sometimes mean higher risk. If the company issuing the bond faces financial trouble, there is a chance it may not repay the money on time.

Because of this, many investors prefer accessing corporate bonds through debt mutual funds. Fund managers analyse the financial strength of companies before investing, which can reduce the risk for individual investors.

Tax is another factor worth thinking about. Interest from fixed deposits is taxed at your income tax slab every year. For investors in higher tax brackets, this can reduce the actual return quite a bit.

Some other fixed-income options may work out slightly better depending on how long you hold them, which is another reason not to keep everything in deposits.

At the end of the day, fixed income is simply the stable part of your portfolio. Instead of relying only on FDs, a mix of fixed deposits, debt funds, government bonds and good-quality corporate bonds can make that stable portion stronger and more useful.

Each of these options serves a different purpose. Some provide certainty, some offer flexibility and some help improve returns a little. When combined, they create a more balanced fixed-income portfolio than relying on FDs alone.