What are fixed income securities?

Fixed income securities are debt instruments that provide investors with potential periodic interest payments and the repayment of principal at maturity. These instruments can be issued by governments, corporations, and financial institutions. They aim to offer the potential for a relatively steady income stream. In India, common fixed income securities include government bonds, corporate bonds, and debt mutual funds. While they can offer a degree of relative stability, they are not without risk, and their long-term return potential is lower than that of equity investments. This article tells you more about fixed income securities, their types, and considerations before investing.

• Table of contents

• How do fixed income securities work?
• Types of fixed income securities
• Features of fixed income securities
• Investing in fixed income securities
• Things to consider
• Risks associated with fixed income securities

How do fixed income securities work?

Fixed income securities mean investments that have a fixed return potential over a specific period. These instruments have scheduled payouts of interest/coupon payments throughout the investment horizon along with the potential return of principal at maturity.

Thus, fixed income securities provide relative stability of the capital as well as return potential making them suitable for risk-averse Indian investors. However, choosing securities that match one's financial goals and risk profile is essential.

Types of fixed income securities

• Government securities: These include Treasury bills, and government bonds/dated securities issued by the central/state governments.
• Corporate bonds: Debt instruments issued by corporates to raise funds for business needs. They offer a relatively higher yield potential than similar government bonds to compensate for higher credit risk.
• Certificates of deposit (CDs): Deposit instruments issued by banks to institutional/retail investors for a fixed term. They offer a fixed interest rate over the tenure.
• Commercial papers: Short term unsecured promissory notes issued by corporates to meet short term funding needs. They are highly liquid with tenures of 1-3 months.
• Debentures: Debt instruments issued by companies to raise long term funds. They have fixed coupon payments and redemption terms.

Also Read: What are fixed-income mutual funds and who should invest in them?

Features of fixed income securities

• They offer certainty of returns in the form of regular interest/coupon payments till maturity. The interest rate is fixed at the time of purchase.
• The principal amount is potentially repaid at maturity, making them relatively stable compared to instruments like equities.
• Fixed income securities have relatively low volatility and the returns may not fluctuate like in case of equity markets. This makes them suitable for investors with low-risk appetites.
• They are highly liquid for most government securities and top rated corporate bonds as they are actively traded on stock exchanges and OTC markets.
• The return potential may vary based on the credit quality of the issuer and interest rate movements in the economy over the bond's lifetime.

Investing in fixed income securities

In India, fixed income securities are a popular investment class. Individuals, funds, corporations, and governments invest in them to avail themselves of a relatively stable return potential. Modes of investing include direct buying of bonds from primary issuances or stock exchanges and indirect options like bond funds, gilt funds, etc through mutual funds . However, investors must evaluate the credit quality, interest rate risk and liquidity based on their goals before choosing suitable fixed income investments.

Things to consider

Several factors should be considered when investing in fixed income securities as follows:

• Maturity period: Short-term securities tend to be less sensitive to interest rate fluctuations.
• Return potential: Note that fixed income securities may not offer inflation-beating return potential in the long term.
• Liquidity: Some bonds may be harder to sell quickly, affecting flexibility.

Risks associated with fixed income securities

While fixed income securities are considered relatively stable, they still carry certain risks. These include:

• Credit risk: The possibility that the issuer may default on payments.
• Interest rate risk: A rise in interest rates can lower the market value of existing securities.
• Inflation risk: Inflation may reduce the real value of returns over time.
• Liquidity risk: Some securities may be difficult to sell at a fair price when needed.
• Reinvestment risk: The risk of having to reinvest interest earnings at lower rates.

Also Read: The role of equity and fixed income in balanced advantage funds

Conclusion

Fixed income securities offer a way to generate a potential steady income stream and diversify investment portfolios. However, they come with risks and generally provide lower potential returns than equity investments. Investors should research different fixed income securities, understand their characteristics, and consider the taxation structure before investing. These securities may be suitable for those seeking the potential for a relatively steady income stream, but risk factors should always be reviewed.

FAQs

What are fixed income securities?

Fixed income securities are debt instruments that represent a loan given by the investors to the issuer, which could be a government body, a corporation etc. The investor gets a predetermined interest rate and principal repayment at maturity. Common examples include government bonds, corporate bonds, and debentures. These investments have the potential to provide a relatively predictable income stream until maturity.

Are fixed-income securities risk-free?

No, fixed-income securities are not entirely risk-free. They carry risks such as credit risk (issuer default), interest rate risk (fluctuations in bond prices), and inflation risk (returns may not keep pace with inflation).

How do fixed-income securities compare to equities?

Fixed-income securities tend to be less volatile than equities. They offer the potential for a relatively stable income stream, whereas equities offer the potential for higher returns but with greater price fluctuations. While fixed-income investments are generally viewed as less risky, their returns are also typically lower than those of equities.

Are fixed-income securities a suitable investment?

Fixed-income securities can be suitable for investors seeking the potential for a relatively stable income stream with lower volatility compared to equities. They may be suitable for more conservative investors, retirees, or those approaching retirement. However, their potential returns are lower than equities, and they remain subject to market risks.

How do you buy fixed-income securities?

Fixed-income securities can be purchased through multiple channels. Investors can buy government bonds directly from issuers or access them via brokerage platforms. You can also invest in them through debt or hybrid mutual funds, and exchange-traded funds (ETFs), which contain a diversified basked of securities.

What affects the value of fixed-income securities?

The value of fixed-income securities is mainly affected by interest rate movements. When interest rates rise, bond prices typically fall, and vice versa. Other key factors include credit risk, which reflects the issuer’s ability to repay, along with market conditions, inflation expectations, and liquidity levels.

Are bonds fixed-income securities?

Yes, bonds are a type of fixed-income security. They represent a loan from an investor to an issuer, such as a government or corporation. In exchange, the issuer pays periodic interest (coupon payments) and returns the principal amount when the bond matures.

What are fixed-income securities examples?

Fixed income securities include instruments like government bonds, treasury bills, corporate bonds, fixed deposits, non-convertible debentures (NCDs), PSU bonds etc.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.