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What are fixed income securities?

Fixed income securities mean investments 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.

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.

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 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.