[image: http://im.rediff.com/getahead/2009/oct/01debt1.jpg]
*Next*
Welcome back to the world of investment avenues! After the interesting
journey through
equities<http://getahead.rediff.com/slide-show/2009/sep/18/slide-show-1-money-a-few-lessons-in-investing-wisely.htm>,
let us now explore the relative safety of debt.
Debt is an obligation that enables one party to raise funds by promising to
repay a lender along with interest in accordance with the terms of a
contract. As debt is an obligation where the borrower has to pay, this makes
it a relatively safer bet to invest in unless the borrower defaults.
The advantages* *of investing in debt instruments are: relative safety,
assured returns, regular income and stability to your investment portfolio.
The disadvantages* *are: the risk of default or credit, low returns that do
not even beat inflation.
Debt investments should form an important part of every individual's
portfolio. Let us have a look at the various options available to an
individual for investments.
*Bank fixed deposits*
They are one of the most trusted forms of investments in which generally
everybody invest their money. Fixed deposit is usually opened with a bank
wherein you invest a lump sum amount for a fixed period and you earn
interest on the principal amount. It is like giving a loan to the bank in
return for interest.
*Advantages*:* *fixed regular income, liquidity and safety of your
investments if invested in a public sector bank.
*Disadvantages*: In case the bank goes under, your deposits are guaranteed
only to the tune of Rs one lakh. In recent times, FDs have been giving lower
returns due to low interest rates and hence are not able to beat inflation.
All said and done, fixed deposits are still an attractive form of
investments especially for individuals who are looking for safety or need to
achieve their goals within a short period of time and for individuals
considering forming a contingency
corpus<http://getahead.rediff.com/report/2009/aug/10/money-the-building-blocks-of-financial-planning-iv.htm>
.
*Company fixed deposits*
Similar to banks, companies come out with fixed deposits for various tenures
through which they raise a loan for their business. In return an individual
earns interest.
*Advantage*: higher interest rates than bank fixed deposits.
*Disadvantages:* higher risk of default as no guarantee from central
government and if the company goes under, you are in a big soup. Also,
company fixed deposits is unsecured which means if the company goes bankrupt
you cannot claim money against any of its assets.
Do remember to check the credibility of the company by checking the ratings
as given by credit rating companies and also check the past record of the
company.
*The author is a certified financial planner and can be reached at
[email protected]*
http://getahead.rediff.com/slide-show/2009/oct/01/slide-show-1-money-are-your-investments-earning-you-safe-returns.htm
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