Building a Fixed Income Portfolio as an HNI: Beyond FDs and Bonds

Beyond bank FDs

For high-net-worth investors, the fixed income allocation typically starts and ends with bank fixed deposits. This is understandable — FDs are simple, familiar, and covered by deposit insurance up to ₹5 lakh. But for portfolios above ₹2 crore, confining fixed income to bank FDs means accepting below-market yields and inefficient tax treatment.

The HNI fixed income universe is significantly richer.

The instruments available

• Corporate bonds (rated AA and above). Direct corporate bonds issued by well-rated companies typically offer 100–200 basis points above equivalent bank FD rates. An AA-rated 3-year bond might yield 8.5–9.5% versus a bank FD at 7–7.5%. The trade-off is credit risk — which, for AA and above rated issuers, has historically been very low.
• Sovereign Gold Bonds (SGBs). SGBs offer 2.5% annual interest on the issue price plus exposure to gold price appreciation. Held to maturity (8 years), the capital gains are entirely tax-free. This makes SGBs one of the most tax-efficient instruments available in India.
• Market-Linked Debentures (MLDs). MLDs are structured products that offer returns linked to an underlying benchmark (typically NIFTY or a fixed income index) with principal protection. Post the 2023 tax changes, MLDs are now taxed as short-term capital gains regardless of holding period — reducing their tax efficiency but not eliminating their utility as a structured return product.
• Private credit / Performing Credit AIFs. Category II AIFs focused on performing credit lend to mid-market companies at rates of 12–16%. These are typically structured as 3-year funds with quarterly or semi-annual interest distributions. The minimum is ₹1 crore.
• InvITs and REITs. Infrastructure Investment Trusts and Real Estate Investment Trusts offer yields of 6–8% through regular distributions, plus potential capital appreciation. The income is partially tax-free (the return-of-capital component) and partially taxable.

Building the portfolio

A well-constructed HNI fixed income portfolio might allocate across these categories based on three parameters: liquidity needs, tax bracket, and risk tolerance.

For the immediate-liquidity portion (0–6 months of expenses), liquid funds or short-duration debt funds remain the best option. For the medium-term portion (1–3 years), a ladder of corporate bonds and NCDs provides predictable cash flows at yields above FD rates. For the long-term allocation (3–8 years), a combination of SGBs, performing credit AIFs, and InvITs provides the yield premium that justifies locking up capital.

Tax efficiency matters more than gross yield

At the highest tax bracket (approximately 42.7% including surcharge and cess for income above ₹5 crore), the after-tax yield on a bank FD at 7.5% drops to approximately 4.3%. An SGB at 2.5% interest plus 10% gold price appreciation, held to maturity, delivers approximately 12.5% gross — of which the capital gains component is entirely tax-free.

The after-tax comparison is stark: 4.3% for the FD versus 9–10% for the SGB (depending on gold price movement). Tax structuring is not an afterthought — it is the primary driver of fixed income returns for HNI investors.

Our approach

We construct fixed income portfolios for HNI clients using a core-satellite framework. The core (60–70%) is in high-grade corporate bonds and SGBs for stability and tax efficiency. The satellite (30–40%) is in performing credit AIFs and InvITs for yield enhancement. The total portfolio targets a net-of-tax yield of 7–9% — materially above what an FD-only approach delivers.