Meaning of Fixed Income Securities
Fixed income securitiesyield guaranteed returns on investments. They act as a liability for the organisation launching them in the market. Returns on fixed-income investments are generated periodically, and the interest payable on these securities remain constant, irrespective of market fluctuations.
The final value of the fixed income security at the time of maturity is calculated before it is issued. It is made known to the investor at the time of investment. This type of market investment tool is a popular choice for individuals who do not want to be exposed to risks and instead want secure returns on their investment, with additional yields.
Types of Fixed Income Securities
Exchange-Traded Funds
Bond exchange-traded funds mainly operate by investing in various debt securities available in the market, which generate regular and fixed returns. As such, they guarantee stability as returns are provided periodically at a fixed rate of interest. Fixed-income securitiesare popular among retired and risk-averse investors, who prefer stability over gaining market advantage.
Debt Mutual Funds
These funds use the accumulated corpus for investment in varioustypes of fixed income securities,such as corporate and government bonds, commercial papers, money market instruments, corporate bonds, etc.
The main advantage of debt Mutual Funds is that they offer a higher return in comparison to standard savings schemes such as fixed deposits and savings accounts maintained with banks or other financial institutions.
Bonds
It is one of the most common types of tool in thelist of fixed income securities,issued by companies to fund the day to day operations to ensure a smoother production run.
Sincefixed-income bondspose as a liability for the issuing organisation, it has to be redeemed as soon as the company generates adequate revenue.
Money Markets Instruments
Specific money market instruments such as treasury bills, certificate of deposits, commercial papers, etc. are offered as investment avenues at a fixed rate of interest, and hence, are classified underfixed income securities.They are offered for a short period of time, with a maturity period that usually does not exceed a year.
However, suchfixed-income bonds in Indiaare sold over the counter, and hence, are not accessible to standalone investors. It can only be purchased through money market Mutual Funds.
Bank Deposits
Commonly known as fixed deposits, these tools are one of the most secure forms of investment. These fixed-income securities can be availed for both short and long tenures, depending upon the investor.
However, money invested in bank deposits cannot be withdrawn before its maturity period. In case of emergencies, premature withdrawal can be made, but against a penalty.
There are various government-sponsoredfixed income bondsavailable as well –
Public Provident Fund
Investing in such securities is beneficial as these are exempted from tax deductions, and offers a higher interest rate than regular savings schemes. It has zero risks associated with it as a Central Government sponsored scheme.
Senior Citizen Savings Scheme
Thesefixed-income bondsaim to provide financial security to the senior citizens of India. Any person aged 60 and above can invest their funds under this scheme, which is subject to a substantial interest rate fixed by the ministry of finance.
Bonds of Listed Public Sector Units
One of the most populartypes of fixed income securities,these funds attract high returns as they are offered by top-performing public sector units of the country. They are associated with a negligible risk.
Who Should Invest in Fixed Income Securities?
Fixed income bondsare ideal for individuals looking for the safest tools to invest. People wary of stock market fluctuations and looking for stable investments to spend their hard-earned money should opt for Mutual Funds dealing infixed income securities.
It can also be chosen by an avid investor looking to earn secure returns, as well as aiming to diversify his/her portfolio. Such schemes ensure a person has a stable flow of dividend during market downswing when other assets of substantially higher values do not yield adequate returns.
The older section of the society can also choose such securities while looking for alternative sources of investing. Most types of fixed income securities fulfil their essential requirement criteria of low risk and stable returns.
However, investing in fixed income securities might reduce the real value of the money invested, as no adjustments are made against the inflation. Market advantage cannot be gained in case of a hike in the average interest rates of the stock market.
Things to Consider
Before investing infixed income bonds in India,there are several things you should keep in mind.
- Capital gains under fixed income securities are subject to taxation as per the Income Tax Act of India, 1963. 20% deduction (after adjustments made for indexation) is made in case of long term gains, while short term capital gains are taxable as per the income of the investor.
- Mutual Funds investing in fixed income bonds tend to be actively managed to ensure highest returns for investors with guaranteed stability.
- The investment strategies of such Mutual Funds differ according to their respective maturity period. In case of a short-term investment scheme, money market instruments and debt funds are targeted from thelist of fixed income securities.ETFs are optimal for a longer tenure.
- These funds are generally highly liquid, satisfying the investor's cash requirements as and when demanded.
Risks Associated with Fixed-Income Securities
Credit Risk
Debt mutual funds are funds that invest in debt tools such as treasury bills, corporate bonds, and so on. Credit risk emerges when the bond or debt security issuer fails to make timely interest and principal payments. To reduce credit risk, it is best to invest in mutual funds that invest in high-quality assets.
Interest Rate Risk
Changes in interest rates affect bond prices and, as a result, debt mutual fund returns. Bond prices decline when interest rates rise, and vice versa. This is referred to as interest rate risk.
