Fixed income securities are debt instruments through which an investor lends money to a government, company or another eligible issuer. In return, the issuer may make scheduled interest payments and repay the principal on maturity.
Despite the name, the income is not always based on a fixed interest rate. Some instruments carry floating coupons, while Treasury Bills earn a return through the difference between their purchase price and face value. Understanding this distinction, along with credit quality, yield and maturity, can help investors look beyond the advertised interest rate.
What are fixed income securities?
Fixed income securities are financial instruments issued to raise borrowed capital. Their terms usually specify the face value, coupon or return structure, payment schedule and maturity date. Subject to the issuer meeting its obligations, the investor receives the agreed payments and the principal amount at maturity.
Common fixed income securities in India may be issued by:
- The Government of India and state governments
- Public sector undertakings
- Banks and eligible financial institutions
- Companies and non-banking financial companies
- Other entities permitted under the applicable regulations
Unlike an equity shareholder, a debt investor does not own part of the issuing organisation. The investor is a creditor with a contractual claim. This distinction affects potential returns, payment priority and the risks involved.
How do fixed income securities work?
The issuer first decides how much money it wants to borrow and sets the terms of the security. These may include its face value, coupon rate, payment frequency and maturity date. Investors then purchase the instrument either during its initial issue or later in the secondary market.
A fixed-rate bond with a face value of ₹10,000 and a 7% annual coupon would pay ₹700 a year, provided the issuer meets its obligations. The coupon is calculated on the face value, not necessarily the price paid by the investor. If the bond is bought above or below ₹10,000 in the secondary market, its effective yield will differ from 7%.
An investor who holds the security until maturity may receive the face value on redemption. If it is sold earlier, the sale price will depend on prevailing interest rates, the issuer’s credit profile, demand and market liquidity.
Source: Reserve Bank of India, Government Securities Market in India: A Primer
The figures shown are for illustrative purpose only
How are returns from fixed income securities calculated?
Returns from fixed income securities depend on the instrument’s payment structure, purchase price and holding period. They may be assessed through:
- Coupon income: The interest paid on the security’s face value.
- Discount-based return: The difference between the purchase price and redemption value of instruments such as Treasury Bills.
- Current yield: The annual coupon divided by the security’s current market price, expressed as a percentage.
- Yield to maturity: The estimated annualised potential return if the security is held until maturity and scheduled payments are received.
- Capital gain or loss: The difference between the purchase and sale prices when a security is sold before maturity.
The coupon rate may remain unchanged, but the yield can move as the security’s market price changes.
Sources: Reserve Bank of India, Government Securities Market in India: A Primer; SEBI Investor, Understanding Bonds.
Examples of fixed income securities
Common fixed income securities examples range from short-term money market instruments to bonds with maturities extending over several years.
| Instrument | Issuer | How it works |
| Government securities or dated G-Secs | Government of India | Generally pay a fixed or floating coupon and repay the face value at maturity. |
| State Development Loans | State governments | Dated securities used by state governments to raise funds, usually with periodic coupon payments. |
| Treasury Bills | Government of India | Issued for 91, 182 or 364 days at a discount and redeemed at face value. They do not pay a coupon. |
| Corporate bonds and non-convertible debentures | Companies, NBFCs and other eligible issuers | May offer fixed or floating coupons. Credit quality and liquidity vary by issuer and issue. |
| Commercial Papers | Eligible companies and financial entities | Unsecured short-term instruments issued at a discount, generally for periods ranging from seven days to one year. |
| Certificates of Deposit | Eligible banks and financial institutions | Negotiable money market instruments with a maturity ranging from seven days to one year. |
Fixed deposits and small savings schemes may also provide a stated rate of interest, but they are deposits or savings products rather than tradable securities. Similarly, debt mutual funds invest in fixed income instruments but do not themselves promise a fixed return.
Sources: Reserve Bank of India, Government Securities Market in India: A Primer; RBI Commercial Paper and NCD Directions, 2024; RBI Certificate of Deposit Directions, 2021.
Returns on fixed deposits/savings accounts are fixed, however, returns on mutual funds are subject to market risks.
Types of fixed income securities
The types of fixed income securities can also be understood through the way their returns and repayment terms are structured:
- Fixed-rate securities: The coupon rate remains unchanged until maturity, although the security’s market price and yield may move.
- Floating-rate securities: The coupon is periodically reset using a specified benchmark, so the income payment may rise or fall.
- Zero-coupon or discount securities: These instruments do not make regular interest payments. The potential return comes from the difference between the purchase price and redemption value.
- Secured debt securities: The issue is backed by specified assets or security. This may support recovery in the event of default but does not guarantee full repayment.
- Unsecured debt securities: Repayment depends mainly on the issuer’s financial position and contractual obligation, without backing from identified assets.
- Callable or puttable securities: Some bonds allow the issuer to redeem early or give investors the right to seek early repayment, subject to the issue terms.
Features of fixed income securities
The main features of fixed income securities help investors assess how an instrument may behave:
- Face value: The amount on which the coupon is generally calculated and which may be repaid at maturity.
- Coupon rate: The stated interest rate. It may be fixed, floating or absent in the case of discount instruments.
- Yield: The potential return based on the security’s market price, coupon, maturity value and remaining tenure.
- Maturity: The date on which the principal is scheduled to be repaid. Maturities can range from a few days to several decades.
- Credit quality: An assessment of the issuer’s ability to meet interest and principal obligations.
- Market price: The price at which the security trades. It may rise or fall even when the coupon remains unchanged.
- Liquidity: The ease with which the instrument can be sold without accepting a substantial price reduction.
- Payment priority: Debt holders generally rank ahead of equity shareholders if an issuer is liquidated, though recovery is not assured.
Sources: Reserve Bank of India, Government Securities Market in India: A Primer; Insolvency and Bankruptcy Board of India, Insolvency and Bankruptcy Code, 2016.
Benefits and advantages of fixed income securities
Fixed income instruments can serve different purposes within a portfolio, depending on their structure and the investor’s requirements:
- Scheduled income: Coupon-paying securities may provide income at stated intervals, subject to the issuer meeting its obligations.
- Defined maturity: A known maturity date can help align investments with expenses expected around a particular time.
- Portfolio diversification: Fixed income and equity investments may respond differently to interest rates, economic conditions and market sentiment.
- Potentially lower price variability: Some short-duration and higher-quality debt instruments may fluctuate less than equities, though they are not free from price movements.
- Choice across maturities: Investors can select instruments ranging from short-term Treasury Bills to long-term government and corporate bonds.
- Priority over equity: Debt holders generally have a prior claim over shareholders on an issuer’s assets during liquidation.
Investing in fixed income securities
Investors can access fixed income instruments directly or through pooled investment products.
Government securities, Treasury Bills and State Development Loans can be purchased through the RBI Retail Direct platform in the primary and secondary markets. Certain bonds and listed NCDs may be available through public issues, stock exchanges, brokers or eligible investment platforms. Availability, minimum investment amounts and liquidity differ across instruments.
Indirect routes include debt mutual funds, target maturity funds and debt exchange-traded funds. These products hold portfolios of debt and money market instruments. Their values can fluctuate, and their potential returns are not fixed or guaranteed.
Before selecting a route, consider whether you require a defined maturity, periodic income, professional portfolio management or easier diversification across issuers.
Sources: Reserve Bank of India, RBI Retail Direct Scheme FAQs; SEBI, Master Circular for Issue and Listing of Non-Convertible Securities, 2025; AMFI, Introduction to Mutual Funds.
Who should consider investing in fixed income securities?
Fixed income securities may be considered by investors looking for relatively steady income and portfolio diversification. These may include:
- Income-seeking investors: Those looking for periodic income through government securities, corporate bonds or debt mutual funds.
- Investors with defined timelines: Those who want to align an investment’s maturity with a planned expense.
- Investors seeking diversification: Fixed income can complement equity exposure, as the two asset classes may respond differently to market conditions.
- Investors who prefer lower volatility: Fixed income securities may experience fewer price fluctuations than equities, depending on the instrument.
- Investors approaching financial goals: A fixed income allocation may help reduce portfolio variability as a planned withdrawal gets closer.
How are fixed income securities taxed in India?
The taxation of fixed income securities in India depends on the instrument, how the return is earned and whether the gain is classified as short-term or long-term.
- Interest or coupon income is generally taxable at the investor’s applicable income-tax rate unless a specific exemption applies.
- Gains from the sale or redemption of a security may be treated as capital gains. Long-term capital gains are generally taxed at 12.5% without indexation, while short-term gains are usually taxed at the applicable rate.
- Unlisted bonds, market-linked debentures and debt mutual fund units may follow different tax rules.
Sources: Income Tax Department, Section 197 of the Income-tax Act, 2025; Income Tax Department, Section 50AA.
The tax information in this article is based on prevailing laws at the time of publishing the article and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.
Things to consider before investing in fixed income securities
The quoted interest rate tells only part of the story. Review the following factors before investing:
- Issuer and credit quality: Examine the issuer’s financial position and the instrument’s credit rating. A rating reflects a credit rating agency’s opinion on the likelihood of timely repayment and may change during the instrument’s tenure. It is not a guarantee of repayment or a recommendation to invest.
- Coupon and yield: A higher coupon does not always mean a higher potential return. Compare the purchase price, yield to maturity and repayment terms.
- Maturity and duration: Longer-duration securities are generally more sensitive to changes in market interest rates.
- Liquidity: Check whether the instrument is actively traded and how easily it can be sold before maturity.
- Call and put provisions: Early-redemption clauses may change the expected holding period and reinvestment requirements.
- Inflation: A stated return may lose purchasing power if inflation remains higher than the income earned.
- Taxation and costs: Evaluate brokerage, fund expenses and the applicable tax treatment to understand the potential post-tax outcome.
- Portfolio fit: The instrument’s maturity and risk profile should correspond with the investor’s goals, time horizon and capacity for price fluctuations.
Source: SEBI, FAQs on Credit Rating Agencies, March 2026
What are the risks and limitations of investing in fixed income securities?
While fixed income securities are often considered relatively stable compared with equities, they still carry certain risks. These include:
- Credit risk: The possibility that the issuer may default on interest or principal payments. A credit-rating downgrade can also reduce the security’s market value.
- Interest rate risk: A rise in market interest rates can lower the value of existing securities, particularly those with longer maturities.
- Inflation risk: Inflation may reduce the real value, or purchasing power, of returns over time.
- Liquidity risk: Some securities may be difficult to sell at a fair price when needed.
- Reinvestment risk: Interest or maturity proceeds may have to be reinvested at lower prevailing rates.
- Call risk: If the terms allow early redemption, the issuer may repay the security before maturity, potentially requiring the investor to reinvest at a lower rate.
Conclusion
Fixed income securities can add scheduled income and a defined maturity structure to a portfolio. However, the word “fixed” should not be mistaken for a fixed market value or assured repayment.
Coupon, yield, maturity, credit quality, duration and liquidity all influence how a security may perform. Comparing these factors, rather than choosing an instrument only for its advertised interest rate, can provide a clearer view of its potential role and risks.
FAQs
Are fixed income securities risk-free?
No. Fixed income securities may carry credit, interest rate, liquidity, inflation and reinvestment risks. Government securities do not carry domestic credit risk, but their market prices can fluctuate if they are sold before maturity.
Do all fixed income securities pay a fixed interest rate?
No. Fixed-rate securities pay a stated coupon, while floating-rate securities have coupons that change with a benchmark. Treasury Bills and zero-coupon securities do not make periodic interest payments and generate potential returns through the difference between their purchase and redemption values.
What is the difference between equity and fixed income securities?
Equity represents ownership in a company, while fixed income securities represent money lent to an issuer. Equity returns depend on dividends and share-price movements. Fixed income returns generally come from coupon payments or price differences, along with principal repayment at maturity.
Are fixed income securities suitable for all investors?
Fixed income securities may be suitable for investors seeking periodic income, portfolio diversification or investments linked to defined timelines. The suitability of an instrument depends on its credit quality, maturity, liquidity and sensitivity to interest-rate changes.
How can you buy fixed income securities in India?
Government securities, Treasury Bills and State Development Loans can be purchased through RBI Retail Direct. Listed bonds and NCDs may be bought through public issues, stock exchanges, registered brokers or SEBI-registered online bond platforms. Indirect exposure is available through debt mutual funds and debt ETFs.
What affects the value of fixed income securities?
Their value is influenced by market interest rates, credit quality, remaining maturity, liquidity, inflation expectations and demand. Bond prices generally fall when market interest rates rise and increase when rates decline, although other factors can also affect the price.
Are bonds fixed income securities?
Yes. Government bonds and corporate bonds are common types of fixed income securities. However, not every fixed income security is a bond. Treasury Bills, Commercial Papers and Certificates of Deposit are other examples.
What does fixed income mean in a portfolio?
Fixed income refers to the portion of a portfolio invested in debt and money market instruments. It may support periodic income, diversification, liquidity management or investments linked to planned expenses.
Are debt mutual funds fixed income securities?
No. A debt mutual fund is a pooled investment vehicle that invests in fixed income and money market securities. Its NAV changes with the value of its underlying holdings, so its potential returns are neither fixed nor guaranteed.
What is the difference between coupon rate and yield?
The coupon rate is the interest paid on a security’s face value. Yield reflects the potential return based on the price paid, coupon payments, maturity value and remaining tenure. Therefore, a bond’s yield can differ from its coupon rate.
