Monthly income scheme v/s floating-rate bonds: Which suits you more?
What's the story
Monthly income schemes and floating-rate bonds are two popular investment options that cater to different financial goals. While both aim to provide regular returns, they differ significantly in terms of risk, return potential, liquidity, and investment horizon. Understanding these differences can help investors make informed decisions based on their financial needs and risk appetite. Here are five key differences between monthly income schemes and floating-rate bonds.
#1
Return potential variations
Monthly income schemes usually offer fixed returns, which means investors know how much they will earn each month. Floating-rate bonds, on the other hand, have returns that change with market interest rates. This could mean higher returns when rates go up, but also lower returns when they fall. Investors looking for stable monthly earnings may prefer the former, while those willing to take on some risk for potentially higher returns may opt for the latter.
#2
Risk levels involved
Monthly income schemes are generally less risky as they provide fixed returns over a certain period. Floating-rate bonds are more volatile as their returns depend on market interest rates, which can be influenced by economic factors. Investors willing to take on more risk for higher potential rewards may find floating-rate bonds appealing, while risk-averse investors may prefer the stability of monthly income schemes.
#3
Liquidity considerations
Liquidity refers to how easily an investment can be converted into cash without affecting its price significantly. Monthly income schemes usually have a lock-in period during which funds cannot be withdrawn without penalties. Floating-rate bonds tend to be more liquid as they can be sold in secondary markets before maturity, offering greater flexibility to investors who may need access to their funds quickly.
#4
Investment horizon differences
The investment horizon is the time period an investor plans to hold an asset before selling or redeeming it. Monthly income schemes usually have shorter horizons with fixed terms, such as three years or five years. Floating-rate bonds may have longer maturities but also offer periodic interest payments that adjust with market conditions over time.
#5
Tax implications
Tax treatment can vary significantly between these two investment options based on local laws and regulations governing taxation on interest earned from different types of assets held by individuals or entities within specific jurisdictions worldwide today.