There are many financial instruments known in the Indian market for investors to choose for investment. These instruments are classified into varied categories based on several factors. The earlier you start investing the more returns you can expect out of it. Since every investment option carries risks, it is advised to consider investing your fund into different assets. Diversifying your portfolio is a clever idea because fixed-income securities can protect you against wild fluctuations or volatility in the financial market. It can also reduce the overall risk in an investment portfolio.
In this context, we are going to talk about the popular option i.e., fixed-income securities are known to provide a host of benefits. Investing after expanding your knowledge will help you take better decisions and maximize your returns in no time. Let us learn more about it.
What are fixed-income securities?
Fixed-income securities are a type of debt instrument that is popular for offering returns that are fixed, and predictable, and for repayment of the invested principal. It is one of the popular categories known to provide a range of products. These products are made available by government and private entities. These investment products help issuers raise funds for one or more reasons. It has its own pros and cons. You can learn more about it in this content.
The popular products in the Fixed income securities include –
1. Bonds – Debt security is known to offer numerous advantages. It is an effective way to raise funds for various operations and reasons. Government and private entities issue bonds with a guarantee to pay fixed interest and repayment of the face value or principal at maturity. Bonds are classified as secured and unsecured bonds. The popular type of bonds is corporate bonds, government bonds, green bonds, zero coupon bonds, Tax-Free Bonds, Convertible Bonds, Covered Bonds, PSU, and more. Bonds are an incredibly good option to diversify your portfolio. They can help you manage risk-reward and maximize your profit. Also, bonds are less volatile and are known to be a defensive asset category.
2. Money market instruments
Are you wondering what are Money market instruments? Do you wish to learn about it? Money market instruments are aimed at increasing the financial liquidity of businesses. It is short-term security that can be easily converted to cash. Thus, its liquidity feature makes it a desirable choice. Examples are call money, certificates of deposit (CDs), commercial paper, short-term Treasuries (e.g., T-bills), repurchase agreements (repos), inter-corporate funds, etc.
3. Treasury Bills
A dependable and preferred option for investment for investors in India is Treasury bills or T- Bills. It is issued to raise the necessary fund by the Central Government. They have short-term maturities with a maximum maturity of up to one year. Treasury bills or T- Bills in India are issued with maturity periods that include 91 days T-Bills, 182 days T- Bills, and 364 days T – Bills. The Central Government issues T-bills at a discount to the face value. An investor in T-bills gets the face value amount at the end date of maturity.
What is the return on T-bills?
For Treasury bill investors, the difference between the face value and the initial value is the actual earned return. Since these are backed by the Government of India they are considered the safest short-term fixed-income instruments.
4. Fixed Deposits (FDs)
These are exceptionally good options made available by banks including private and public sector banks along with Non-Banking Financial companies (NBFCs). Fixed Deposits are a particularly worthwhile investment avenue coming to you with good features and advantages. It can help you diversify your portfolio. It needs you to have a saving account if you wish to invest in a bank. The minimum amount required for a regular bank FD is Rs. 5000. You can choose to invest in a bank or with NBFCs considering the interest rate, creditworthiness, and other essential factors. Banks like SBI offers interest rate ranging between 2.90% to 5.50% and HDFC bank offers 2.50% to 5.60%.
More About Fixed Income Securities
What are the key terms applicable to Fixed income securities?
Face value, coupon, maturity, principal, average coupon rate, yield, interest, returns, debt, basis point, bid, benchmark, called bonds, convertible bond, debt, creditworthiness, ratings, risk, reward, issuer, bondholder, ISIN, par value, fixed income, primary market, secondary market, redeem, and more.
More About the Key Terms
- Face value – every bond has a principal value and face value refers to the same. It is also the price that an issuer pays back to a bondholder at maturity. For instance, a bond issued has a minimum value of Rs. 1000 in India.
- Coupon rate – it is the rate of interest that a bond issuer agrees to pay to a bondholder at a predefined interval. The coupon rate can vary from one issuer to another that can be paid monthly, quarterly, bi-annually, or annually.
- Credit rating – refers to the creditworthiness of an entity issuing bonds. It is a medium to measure the issuer’s creditworthiness. The rating given by the authorized rating agencies can include A, AA, BBB, BB, B, CCC, CC, C, and D. The +/- is used to break the ratings further. AAA is considered the best and safe for purchase.
Benefits of Investing in Fixed income securities
Every investment avenue has its pros and cons. Fixed-income securities are known to render many benefits to investors. The benefits can be considered while you plan to invest.
Below are the Key Benefits of Investing in Fixed Income Securities
• Predictable returns
The coupon rate applicable to a specific bond is declared at the time a bond is issued. It thus helps a buyer estimate the returns payable at the agreed interval. Predictable returns help investors plan their long-term and short-term goals.
• Stable returns
The stability of returns offered to investors in fixed-income securities is a key attraction for investors. The returns are steady since bonds and other products offer a fixed rate of interest. The return is comparatively better and fix irrespective of market conditions.
• Higher returns
Every individual expects higher returns on investment (ROI). You can fulfil your wish of earning higher returns by investing in bonds and other products in the Fixed income securities segment.
• Investment security
Your capital (face value) invested is at a lower risk. Compared to equities, the risk is low. Some of the instruments come with government backing that makes them more secure minimizing the risk of default. Bonds with higher ratings further minimize the risks and make them safe. Investment in Fixed income securities is relatively safe and an ideal choice for risk-averse investors.
• Low investment
Bonds require you to make a very low investment of Rs. 1000 that can be increased by multiple of face values. You do not need heavy investment to commence trading in bonds.
It is the feature and advantage that make the instrument more attractive. As an investor, you do not need to worry about the exit option. You can encash your bonds in the secondary market whenever you are in need of money.
• Portfolio diversification
Fixed-income securities are an exceptionally good option for investors looking for portfolio diversification. It is considered a defensive class of assets that can help you minimize risks and maximize profits. Unlike health, wealth creation also needs you to stay disciplined and follow regular saving habits. Also, the way you are required to include different food intakes in your meal to maintain good health. In the same way, you need to diversify your investment to lessen risks and maximize profits.
Portfolio diversification is recommended considering the market volatility.
Trading in bonds or other fixed-income securities does not necessarily need you to be highly educated, technically sound, or a financial expert. You just need a Demat account, an account with a bank, and it can be traded online on secure platforms like BondsIndia and others in India.
Risks of Investing in Fixed-Income Securities
• Credit risk
• Interest rate risk
• Spread risks
• Liquidity risks
• Inflation risks
• Reinvestment risks
Below are the Key Risks associated with Investing in Fixed Income Securities
• Interest Rate Risk
Interest rate risk is a significant risk of concern for retail investors. The price of Bonds falls as there is a rise in the interest rate because there is an inverse relationship between bond prices and interest rates. Bond prices fall in case the interest rates rise, and vice versa, which is because of the interest rate risk.
• Credit Risk
It is another big concern for investors, specifically those with a low appetite for risks. A bond issuer when failing to repay the face value or principal, impacts the credibility of the issuer. It is the risk of capital loss when the bond issuer fails to return the principal or interest. Credit risks always exist hence it is advisable to make an investment in a company having a higher credit rating.
• Reinvestment risk
High coupon rates have high reinvestment risks. It refers to the probability that you will not be able to reinvest coupon payments from a bond at a rate similar to the prevailing return.
Why Choose BondsIndia to Trade in Fixed Income Securities?
Trading in bonds is a steps process at BondsIndia, known to provide a technology-enabled secure system. BondsIndia is a fast-growing fintech engaged in rendering tech-based solutions to online investment needs, primarily in the fixed-income class. Access to bonds and trading in bonds have been made worry-free for investors in the retail segment in India.
You can have access to a diverse range of investment products. Shortlist from the top-performing bonds available for trade at BondsIndia to enjoy the advantage of higher returns.