Key Points
- Loans made to corporates, governments, or banks in exchange for interest payments made to the investor are known as fixed-income securities.
- Bonds issued by corporates; Governments are among the common fixed-income assets.
- Bond prices grow when interest rates decline.
- The key, though, is that Fixed-income investments can help balance your portfolio’s risk and reduce the volatility of things like stock market downturns.
An investment strategy that guarantees a constant and fixed income while protecting your wealth is prudent in a world where nothing can be promised. Fixed-income investment products are a sensible decision because they operate as secondary income and have high-yielding interest rates, irrespective of current market volatility and global unpredictability. Contrary to the markets in the West, investing in fixed income is a relatively new phenomenon in India. Although institutional investors once monopolized the market, today’s options and access have allowed individual investors to participate on an equal footing.
When interest rates are rising, investors can now get fixed deposit returns that are higher than inflation, which hasn’t been possible since April 2022 when inflation was 7.79% and as of December 6.71%. Several banks and NBFCs now provide returns that not only outperform inflation but also interest rates from small savings schemes as a result of the RBI’s repo rate increase, which has caused debt investors to fall back in love with fixed deposit products.
Before stepping into the importance of investing in fixed income, let us understand what fixed income is, how it works and whether it is suitable for you. Get the answers first.
What is Fixed Income?
Fixed-income investing is a lower-risk approach that emphasizes obtaining regular returns from instruments like bonds, money-market funds, and Banks deposits. As retirement looms, a lot of people change their portfolios to a fixed-income strategy because they may need to rely on their investments for a steady income. Although investing in fixed-income assets is typically less dangerous than doing so in more growth-oriented products like equities, the strategy is not without risk.
Financial Planning: It’s 3 phases!
How does Fixed-income Investing Work?
The goal of fixed-income investment is to provide you with a steady stream of income. Let’s imagine you decide to invest Rs. 10,000 in a fixed-income investment because you feel comfortable doing so. You will evaluate the following products’ interest rates, payment schedules, maturity dates—the points at which you can get your money back—and the likelihood of repayment. Do you desire to be able to recover the initial Rs. 10,000 within a calendar year? 3-year period? Or do you intend to hold onto that cash for an even longer amount of time? How frequently do you wish to be paid throughout that time?
When your needs are clear, you can invest your money and use the interest payments that result from that investment to help with some of your expenses.
What are some examples of Fixed-income Investing?
1. PMVVY Scheme
The Indian government offers a subsidized scheme for senior citizens called Pradhan Mantri Vaya Vandana Yojana (PMVVY). With the option to select a payout frequency of monthly, quarterly, half-yearly, or yearly, this scheme provides a regular and guaranteed income. Additionally, it offers a predetermined rate of return that the GOI assesses at the start of every year. This scheme has a ten-year lifespan.
However, it offers its users significant liquidity and the chance to leave the scheme at any time. Therefore, this yojana is most suited to senior citizens who want to regularly earn an assured return in addition to receiving insurance benefits.
The buying value ranges from 1.56L to 15L. The individuals pay taxes at the appropriate rates; TDS is not subtracted.
2. Government Bonds
The Central and State governments of India issue government bonds, which are debt securities, to fund their expenditures and manage the money supply. For the government, the RBI issues bonds, which it then offers to the public for purchase in exchange for investments. The principal and interest will be paid back by the government on the designated maturity date. Additionally, the interest rate that is offered by it can be either fixed or adjustable. These ties might last anything from 91 days to 40 years. In addition, investors can select a variety of bonds from the government based on their requirements. As they desire security from their investments, government bonds are excellent for investors with low-risk tolerance levels.
3. Corporate Bonds
Corporate bonds can benefit both the company receiving the financing and the bondholders who receive monthly income as they help businesses grow. It’s crucial to keep in mind though that some firms are considerably more financially sound than others.
Knowing how a firm generates cash flow from its operations is important because that will probably be how it pays interest on the bonds. You can lose some or all of your investment if the company experiences financial difficulties and is unable to pay bondholders.
You need to be aware of “junk bonds,” or bonds issued by specific firms with a low credit rating will have a higher interest rate but a considerably higher danger of default.
Investment Strategies in the Bond Market
Importance of Fixed Income
The fixed income market’s structure. The largest capital markets worldwide are fixed-income markets. An essential part of the global financial system is played by the fixed-income markets, which have a lot of liquidity. Governments, public sector organizations, private sector issuers, financial institutions (as both issuers and price-makers), investors, and asset owners are the key stakeholders in the fixed-income markets.
Despite giving investors the chance to benefit, the current stock market is quite volatile, which increases risk as well as the possibility of profit. Investors can lower this risk to tolerable levels by using fixed-income products. These instruments are a powerful tool for achieving a portfolio’s goal when creating an asset allocation strategy and for an investment portfolio with a short time horizon, acting as the main counterweight to equities and reducing risk while online trading. Investors looking for a stable income with less risk prefer fixed-income instruments. A wide range of investors are drawn to a consistent stream of income, but retirees (or other groups who choose to avoid risk) who need money for daily expenses are particularly attracted to it. Dividend payments are optional for corporates; they are not required to make them. The interest on their fixed-income assets, on the other hand, must be paid.
Time value of money
Pros
1. Steady Income
Knowing exactly how much money you will make from fixed-income investments might make budgeting easier because it will consistently provide you with a constant income.
2. May keep you safe from Market Volatility
Nobody will ever be able to forget the 2008 market collapse since it will forever serve as a point of reference for saving. Realistically, retiree investors cannot tolerate that level of volatility and would eventually sell their equities and then repurchase them at the worst possible periods. Fixed-income instruments can be included in portfolios to reduce short-term volatility rather than fighting human nature to make poor investing judgments.
3. Tax Benefits
There are various fixed-income investments that offer tax advantages, such as 80c and PPF investments.
Cons
1. Lower Returns
Fixed-income investments often yield lower returns than riskier assets like stocks because of their relative safety.
2. Interest Rate Risk
Interest rate risk generally represents the biggest drawback of fixed income.
3. Issues with Withdrawals
Keep in mind that taking money out of your fixed-income assets is more complicated than just taking money out of your savings account. For instance, you would undoubtedly have to pay a penalty if you place your money in a five-year Bank FD and withdraw it after two years.
Additionally, if you have to sell a bond before it matures and interest rates have increased, you might have to do so at a loss since the bond will be repriced by the market using the current rate of interest.
Is Fixed-income Investing right for you?
If you’re living on a fixed income and trying to find ways to increase your savings, fixed-income investments may be a particularly attractive choice for you.
And if you’re concerned about the stock market’s potential wild ups and downs, the fixed-income investment may be able to help you feel a little better at night.
Fixed-income investments can offer some stability, particularly for investors who hold them for their ability to generate income rather than actively trading based on price changes. Investors who are less concerned with a capital appreciation or who are less tolerant of significant market swings may benefit from a portfolio that offers a predictable return from a stream of income payments.
Closing Thoughts
In order to thrive in today’s cutthroat economy, fixed income has become a crucial instrument. It is always advisable to consider having a fixed income source other than regular income because the cost of living and bills are rising significantly.
FAQs on Investing in Fixed Income
1. Why do I consider investing in fixed-income securities?
Due to the market’s constant volatility, equities markets will tune into that music. No matter what the market is, investments in fixed-income assets will yield additional income.
2. Is it safe to invest in fixed-income securities?
Yes, it is less risky than the stock market.
3. Example of fixed-income securities.
Bank fixed deposits, Government bonds, corporate bonds, PPF, and Pension Schemes.
