What are fixed
income securities?

Fixed income securities refer to investment products that provide fixed returns over a certain period of time, based on their fixed interest rate. They are considered less risky compared to equity investments, provide steady and predictable returns and suit those investors who prefer stability over returns. Equity and fixed income securities differ in how they pay out based on their profitability. Equity securities pay out dividends whereas fixed income securities pay out interest.

Types of Fixed Income Securities

Government Bonds

These are debt securities issued by the Indian government, such as Sovereign Gold Bonds (SGBs), Treasury Bills, and Government Securities (G-Secs).

Corporate Bonds

These are debt instruments issued by corporations to raise capital. Investors lend money to the company in exchange for regular interest payments and the return of principal at maturity

Public Provident Fund (PPF)

PPF is a government-backed savings scheme with a fixed interest rate. It offers tax benefits and has a lock-in period of 15 years

Fixed Deposits (FDs)

Fixed deposits are offered by banks and non-banking financial companies (NBFCs). They allow individuals to invest a lump sum for a fixed period at a predetermined interest rate

Debentures issued by Financial Institutions

Financial institutions like National Bank for Agriculture and Rural Development (NABARD) and Small Industries Development Bank of India (SIDBI) issue debentures that offer fixed returns

Non-Convertible Debentures (NCDs)

NCDs are long-term debt instruments issued by corporations, usually with a fixed interest rate. They cannot be converted into equity shares of the issuing company

National Savings Certificate (NSC)

NSC is a fixed income investment option offered by the Indian government. It has a fixed interest rate and a maturity period of five or ten years.

Post Office Monthly Income Scheme (POMIS)

POMIS is a savings scheme offered by the Indian post office. It provides a fixed monthly income for a specified period.

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Advantages of Fixed-Income Securities

Fixed income securities are a popular investment option among investors due to their various advantages like

Stable Income Generation

Fixed income securities, such as bonds and debentures, provide a predictable stream of income through regular interest payments. They are ideal for investors seeking a steady cash flow and a reliable source of income, especially during uncertain market conditions.

Capital Preservation

Fixed income securities are generally considered lower risk compared to equities or other volatile investments. They offer the potential for capital preservation, making them attractive to conservative investors who prioritize wealth preservation over aggressive growth

Diversification

Including fixed income securities in your investment portfolio helps diversify risk. They often have a low correlation with equities, providing a level of stability during market fluctuations. By diversifying across different types of fixed income securities, issuers, and maturities, you can enhance risk-adjusted returns and reduce overall portfolio volatility

Disadvantages of FIS

Inflation poses a major threat to fixed income securities, as the interest rates on these securities are often fixed, making the returns’ real value decline over time with inflation

The prices of these securities respond inversely to interest rate changes. When interest rates change, the prices of these securities fluctuate resulting in capital loss for the investors

Inveting only in these securities may lead to a lack of diversification and an overall lower portfolio return

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How to Invest in Fixed
Income Securities?

Investing in fixed income securities is a crucial component of any diversified investment portfolio. The best fixed income securities to invest in may vary depending on one's investment goals and risk tolerance.

Firstly, Evaluate your risk tolerance and investment goals to choose the right type of fixed income investment i.e. government bonds, corporate bonds, treasury bills, NCDs, FDs etc

Next, do thorough research on the specific investment you want to opt for, including its credit rating and yield to maturity. One must also consider the taxes associated with the investment.

Another important aspect is timing the market. It is vital to have a clear understanding of bond market dynamics and interest rate fluctuations before making investment decisions.

It is also advisable to diversify your fixed-income investment portfolio across different types of securities, issuers, and maturity periods.

Lastly, monitor your investments regularly to ensure they are in line with your investment objectives.

Conclusion

To wrap up, individuals in search of a reliable income flow with minimal risk might find fixed income securities to be a promising investment opportunity. The diverse array of fixed income securities at hand offers investors varying degrees of risk exposure and possible earnings. Though they offer several advantages, such as stability and predictable returns, these securities also have their disadvantages, including lower potential returns and susceptibility to changes in interest rates.

Ultimately, investing in these securities requires a careful analysis of one's investment objectives, risk tolerance, and financial situation. With a disciplined investment approach and professional guidance, investors can effectively incorporate fixed income securities into their investment portfolio for a more diversified and balanced approach to wealth management

Frequently Asked Questions

What are the various types of fixed income securities in India?

In India, there are various types of Fixed Income Securities available like government bonds, corporate bonds, treasury bills, debentures, fixed deposits, senior citizen saving schemes, etc.

What is the comparison of risk between the various fixed income securities?

The risk associated with Fixed Income Securities is broadly assessed in relation to the issuer. Securities issued by the Government and quasi-government authorities are considered safer than those issued by private corporations. Within private corporations, issuers with higher credit ratings are generally considered safer.

What is the comparison of returns between the various fixed income securities?

The return from fixed income securities is directly related to the risk perception. Higher the risk, higher the expected return. Thus, government securities generally offer lower interest rates compared to corporate fixed deposits.

What is a Debenture?

A debenture is a long-term debt instrument issued by corporations or governments to raise funds. It is unsecured and carries no collateral. The issuer promises to repay the principal along with periodic interest until maturity.

What is NCD?

A Non-Convertible Debenture (NCD) is a debt security issued by a company that cannot be converted into equity shares. It carries a fixed interest rate and a defined maturity date.

What is a Government Bond?

A government bond is a debt instrument issued by the national government to finance its spending. Investors lend money to the government and receive the principal and fixed interest over time.

What is a zero coupon bond?

A zero coupon bond does not pay interest during its term but is issued at a discount to face value. On maturity, the investor receives the full face value. These are also called deep discount bonds.

What is a Corporate Bond?

A corporate bond is a debt instrument issued by companies to raise funds for projects, expansion, or other financial needs. Investors are repaid with interest over a fixed tenure.

What is Corporate Fixed Deposit?

A corporate fixed deposit allows individuals or organizations to deposit money with a company for a fixed term. These generally offer higher interest rates than bank FDs.

What is Capital Gain Bond?

Capital Gain Bonds offer tax exemption on long-term capital gains under Section 54EC of the Income Tax Act. These bonds are issued by the government and support infrastructure projects.

What is peer to peer lending?

Peer to peer lending is an online platform-based system where individuals lend money directly to borrowers without involving banks or traditional financial intermediaries.

What is the tenure of investment in Fixed Income securities?

Fixed income securities in India offer varied tenure options depending on the instrument. Tenures can range from 3 months to 30 years, allowing investors to choose based on their needs.

Can I invest in fixed income securities for short term?

Yes, short-term and long-term fixed income securities are available for investment purposes ranging from 3 months to 30 years.

Is income from fixed income securities always fixed?

Although the name suggests a fixed income, returns may vary based on market conditions. For example, if interest rates rise, the value of existing securities might fall, affecting your overall return.

What is the tax implication on income from fixed income securities?

Tax treatment depends on the type of security, holding period, and investor’s tax slab. Some are tax-exempt, while others are taxed at 20% or at the applicable marginal tax rate.

Are fixed income securities available in demat form?

Yes, most fixed income securities are available in demat form, which makes them easier to buy, hold, and sell electronically.

Are fixed income securities listed on a stock exchange?

Yes, many bonds and debentures are listed on NSE and BSE, providing liquidity through secondary market trading. However, FDs and government saving schemes are not listed.

What is the possibility of loss of capital in case of fixed income securities?

While relatively safer than equity, fixed income investments still face risks like interest rate changes, credit default, and market sentiment, which can cause capital loss if sold before maturity.

Is investment in fixed income securities safe?

Generally considered safer than equities due to predictable returns, but subject to risk based on the issuer's credibility and market conditions.

Is there a guarantee of income in fixed income securities?

They offer predictable returns, but there’s no absolute guarantee. Market factors and issuer defaults can impact income certainty.

Can I withdraw my investment from fixed income securities anytime?

Some allow early withdrawal, but may include penalties or lower returns. Liquidity varies by type of security—evaluate terms before investing.

How do I buy fixed income securities?

You can buy them through registered brokers, banks, or investment platforms. Alternatively, email support@dealplexus.com for assistance.

Can anyone help me to buy Fixed Income securities?

Yes, DealPlexus offers expert assistance to help you choose and invest in suitable fixed income securities.

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