Reset-linked instruments
Also written Reset linked instrument · Rate reset instruments · Periodically reset instruments
Deposits and certificates whose interest rate is not fixed for the whole tenor but re-fixed at intervals to reflect current market rates — the small savings schemes, which the workbook resets every quarter.
In plain language
There is a middle case between a rate locked for the whole term and a return nobody can predict.
In a reset-linked instrument the rate is known — but only until the next reset date. Then it is re-fixed to reflect what market rates are doing. The new rate holds until the reset after that.
The workbook's examples are the small savings schemes: National Savings Certificates, post office time deposits and others. It says their rates are periodically reset, every quarter.
So the income moves. When market interest rates rise, the interest you receive rises. When rates fall, it falls. That is the opposite of a bank fixed deposit, where the rate you agreed on day one is the rate you get on the last day.
The workbook still counts these as fixed-return instruments rather than market-linked ones. The capital does not move. Only the rate does.
How it works
The mechanics are simple and the exam sits on the detail.
The reset cycle. The government announces rates on small savings schemes every quarter. The rate so determined applies till the next revision or reset.
What moves and what does not. Interest income goes up when market rates rise, and down when they fall. The value of the original investment does not change — there is no appreciation and no market price to fall. This is why section 1.2.4 keeps reset-linked instruments in the fixed and guaranteed column, and gives them their own row in the comparison table: the effect of a market rate change only takes effect at the next reset date, whereas a pure fixed-rate instrument feels no effect at all and a market-linked instrument reprices immediately.
Where the reset applies in practice. Chapter 6 gives the product-level detail. The Post Office Recurring Deposit earns interest at rates fixed by the government for each quarter, compounded quarterly. The Post Office Monthly Income Scheme is a 5-year deposit whose rate is announced on a quarterly basis to link it with market dynamics. The Public Provident Fund is described in Chapter 5 as guaranteed but variable, because its interest is reset every quarter.
The reinvestment consequence. Because the rate is not locked for life, a retiree relying on such income carries the risk that the next reset is lower. Chapter 6 makes this point about POMIS: on maturity the money may have to be re-invested at a lower rate of interest.
A worked example
Mr Iyer, 62, holds Rs 9,00,000 in a Post Office Monthly Income Scheme and Rs 9,00,000 in a 5-year bank fixed deposit taken at 7 percent.
Rates below are illustrative; the workbook does not print a rate table for the small savings schemes.
| Quarter | POMIS rate after reset | POMIS income for the quarter | Bank FD rate | FD income for the quarter |
|---|---|---|---|---|
| 1 | 7.4 percent | Rs 16,650 | 7.0 percent | Rs 15,750 |
| 2 | 7.4 percent | Rs 16,650 | 7.0 percent | Rs 15,750 |
| 3 | 6.9 percent | Rs 15,525 | 7.0 percent | Rs 15,750 |
| 4 | 6.6 percent | Rs 14,850 | 7.0 percent | Rs 15,750 |
Two things follow.
His POMIS income fell by Rs 1,800 a quarter between the first quarter and the fourth, without him doing anything. The rate was re-fixed twice in a falling-rate year.
His bank deposit did not move at all. It is locked for five years. That is the protection a pure fixed rate buys, and also its cost: if rates had risen instead, the POMIS would have paid him more and the fixed deposit would have paid him exactly Rs 15,750 anyway.
Neither holding lost a rupee of capital. Rs 9,00,000 is still Rs 9,00,000 in both. Only the income moved — which is the whole definition of a reset-linked instrument.
Why NISM asks about it
Chapter 1, section 1.2.4, introduces the reset and gives reset-linked instruments their own row in the fixed-versus-market-linked table. Chapter 6 then carries the quarterly reset through the individual small savings products — Post Office Recurring Deposit, Post Office Time Deposit, POMIS, NSC and PPF.
The examinable points are the quarterly reset frequency, the fact that the rate applies until the next reset, and the classification question: a reset-linked instrument is still a fixed-return instrument, not a market-linked one. A scenario question may ask what happens to a retiree's income from small savings schemes when market interest rates fall.
Common exam traps
- Reset-linked is not market-linked. The rate changes; the capital does not. The workbook puts these in the fixed and guaranteed column, and a question that offers "market-linked" for an NSC or a post office time deposit is testing exactly this.
- The change bites only at the next reset date, not immediately. That is the distinguishing row in the comparison table.
- A new rate does not always apply to money already invested. The workbook does not say whether an existing certificate keeps its original rate or picks up each reset, and it differs between schemes — so answer only what the passage supports.
- The workbook contradicts itself on the Post Office Time Deposit. Chapter 6 says in one place that the interest is reset each year and in another that the rates are reset every quarter; Chapter 1 says small savings rates are reset every quarter. Carry both and cite the chapter.
- Reinvestment risk is the real exposure, not price risk. A reset-linked instrument cannot fall in value, but its income can shrink and its maturity proceeds may have to go back in at a lower rate.
- The PPF is the clean illustration: Chapter 5 calls it guaranteed but variable precisely because the guarantee is on the capital, not on the rate.
Where this is taught
Free preparation for NISM Series XVIIRelated terms
- Post Office Monthly Income SchemeA five-year, government-guaranteed post office deposit paying interest every month, with a Rs 1,500 minimum, a Rs 9 lakh single or Rs 15 lakh joint maximum, and no tax benefits.
- Public Provident FundA 15-year government-guaranteed savings account for individuals, at a rate reset quarterly, where the contribution, the interest and the maturity value are all outside tax under the old regime.
- Guaranteed but variableA return category between fixed and market-linked — the workbook's description of products like PPF, where interest is guaranteed but its rate is reset periodically rather than fixed for the whole tenure.
- Market-linked return instrumentsInvestments whose return is not known in advance because it depends on the issuer's performance and on market prices — equity shares, mutual funds and listed bonds, in the workbook's own list.
- National Savings CertificateA 5-year, government-guaranteed post office certificate with annual compounding paid at maturity, a Rs 1,000 minimum, no maximum, and an old-regime deduction on the investment.
- Post Office Recurring DepositA five-year post office deposit built from monthly instalments of at least Rs 100, at government-fixed quarterly rates compounded quarterly and paid only at maturity, with no tax benefit.
- Post Office Time DepositA government-guaranteed post office deposit of one, two, three or five years with a Rs 1,000 minimum and no maximum, of which only the five-year deposit qualifies for a tax deduction.
- Mahila Samman Savings CertificateA two-year small savings certificate for women and girls at 7.5 percent compounded quarterly, capped at Rs 2 lakh, whose enrolment window ran from April 2023 and closed on 31 March 2025.