To begin, as an investor, market fluctuations in our investments can scare us of the fact that we may lose our hard-earned money. That is when it is important to consider the features of the asset class you are considering investing in, to determine what will be suitable for you. If you are someone looking for asset diversification or a low-risk profile, fixed-income securities are something that may suit you the best. To know more about it, let us go into the details & understand more about fixed income securities in this piece.
What are fixed income securities?
Fixed income securities are an opportunity for investors to earn a fixed rate of interest over a certain period and get the principal amount at the end of the term. The interest/coupons received on these instruments are quite predictable unlike that of equity markets. Also, to include Bonds, Fixed Deposits, and Government securities are the most prevalent fixed-income investments, but CDs, money markets, and preferred shares are other options amongst them. In these instruments, an investor is essentially lending money to the issuer.
The securities can be issued for a short, medium, or long period, and the issuer might be the government, banks, companies, or financial organizations.
What are the different types of fixed-income securities?
One can choose an instrument as per their risk tolerance, time frame for investing, and financial needs. Different kinds of fixed income securities available are –
Bonds are debt instruments used by governments and major corporations to raise funds. Bonds are essentially loans taken by the issuing entity as a financial instrument. The bond issuer is required to repay the loan amount plus interest for the borrowing. To add, Bonds have the advantage of being a largely risk-free investment. They also provide a steady stream of income by offering customers a set amount of interest regularly. Also, the Bond market is not as volatile as the stock market.
For Example – If you buy a 7-year, Rs. 50,000-Bond with a 4% interest rate, you will receive the interest on that Rs. 50,000 every six months, as well as the principal amount, i.e., Rs. 50,000, at the end of the 7 years. Bonds, such as the 54EC Bonds, provide long-term capital gains tax advantages for investors who have sold their properties. For example, if you have earned Rs. 40,00,000 in long-term capital gains from the sale of a property, you can invest this amount in 54EC Bonds within six months from the date of sale and receive a complete tax exemption on the same.
2. Government Securities:-
Government securities are government-issued debt instruments that allow the government to borrow money. They market these products to help fund day-to-day government functions as well as particular infrastructure and defense projects. These investments function similarly to corporate bond issuance.
Since they are issued by the government authorities, they are less unreliable and pay lower interest.
3. Debt Mutual Funds:-
Debt mutual funds aggregate money from investors and invest it primarily in debt products including fixed income securities, bonds, and other debt instruments. When investing in these instruments, the investor receives predetermined returns. They invest in better debt instruments or instruments of high credit ratings. It is extremely improbable that these securities will default on their payments.
4. Other Securities:-
Apart from these, other instruments include –
a) Public Provident Fund – It is considered to be one of India’s safest fixed-income securities. It was created to give those individuals long-term retirement planning choices, who are not covered by their employers’ provident funds or who are self-employed. One can invest in a PPF through the Indian Postal Service or a bank.
b) Fixed Deposits – Fixed deposit returns are guaranteed, safe, and greater than savings account returns. Fixed deposits have a lock-in period during which you can deposit your money for a time that suits your needs and preferences at an agreed-upon interest rate that will not change during the term. You will receive a certificate on the day of your deposit stating the ultimate maturity amount, as well as the appropriate rate of interest and the term. The returns are unaffected by market volatility and extremes. Senior citizens, that is those over the age of 60, receive a higher rate of interest while investing in FDs.
Also, one gets assured returns, a variety of choices, a digital experience of opening a fixed deposit, and benefits of compounding while investing in this instrument. For example, if you invest ₹10,00,000 in a fixed deposit that pays a 6% annual interest rate, you can earn up to ₹60,000 at the end of a year. Not only that, but you can use Fixed Deposits to receive regular payments and earn interest on them on a monthly, quarterly, or yearly basis.
To add, investing in these deposits is completely seamless. With that in consideration, you can learn more about the numerous Fixed Deposits offered and their features on BondsIndia.
c) NSC or KVP – If you want to invest in a safe, low-risk investment that promises a double maturity amount, choose Kisan Vikas Patra. In the case of NSC, you would like a 2.5-year lock-in rather than a 5-year lock-in. In terms of liquidity, KVP is also a better option than NSC. Both these schemes are available at the Indian Post offices.
Who should invest in fixed-income securities?
In general, fixed-income securities are most suited for senior citizens or individuals with low-risk profiles. However, anyone who wishes to invest in it based on their financial objectives can do so. This is because it might help you generate a steady source of revenue. Investing in fixed-income securities can also help you balance your investment portfolio and generate profit even while markets are unpredictable.
How to invest in fixed income securities?
- For most individuals, investing in fixed income instruments is a completely different experience. And so, Government securities (GOI) are available for purchase through the RBI’s Retail Direct program or a broker. Whereas, Government bonds can also be purchased through the NSE’s “NSE goBID” app.
- Moving further, FDs can be acquired directly from banks, or NBFC/HFC FDs from brokers and they are now available online. A PPF account can be opened at a bank or a designated post office.
- Bonds can be purchased on the main market (by subscribing to a public offering) or the secondary market (from different exchanges where they are traded). To add to that, Bonds India is among the platforms that will guide you through the process of investing in bonds in easy steps.
What are the perks of owning fixed-income securities?
1. Diversification – Fixed income investments have a low connection with equity, allowing for diversification. It indicates that the worth of your investments will remain unaffected by the ups & downs of the market. This will, in return, balance your portfolio by offsetting stock losses if any.
2. Provide a Consistent Source of Income – Fixed income securities provide investors with a consistent stream of cash flows. Furthermore, investors may effectively manage their finances because the quantity and frequency of these cash flows are anticipated in advance.
3. Low Risks – Because these financial products have a low market exposure, they are less influenced by market volatility than stocks or any other funds.This makes such an investment appealing to those with reduced risk tolerance.
4. Preference in the Case of Liquidation: In the event of a business’s liquidation, people who own fixed income securities will be granted priority over those who own other securities issued by the company. For example, if a corporation has issued bonds and equity, and the company falls into liquidation, the company will be obligated to pay for the bonds first, before paying its owners for their equity shares.
What are the risks of investing in these securities?
1. The main risk of fixed-income securities is that the counterparty would default on its repayments.
2. Exchange rate risk & Interest rate risk are the other two risks involved while investing in these securities. Here, Exchange rate risk is the risk that cash flows from securities will lose value after being exchanged for a different currency, also it cannot be avoided. Moving forward, the interest rate risk is the risk that changes in interest rates will reduce the market value of fixed-income security held by an investor.
Fixed-income investments are more stable than pure stock holdings, and their main objective is to offer a fixed percentage of income to the customer instead of just investment growth. Investors rely on these asset types more than any other sort of investment during times of economic downturn in the market. And therefore, one can buy these securities to decrease the risk proportion in their portfolio and maintain a steady income over a while.
BondsIndia provides the most up-to-date information on IPOs, higher-interest fixed deposits, and competitively priced bonds before anybody else. An investor can choose BondsIndia for its easy-to-use interface, reliable communication, and step-by-step instructions to ensure a successful bid.