Different entities regulate the issue and trade of fixed income securities. For example, the securities issued by the bank are looked after by the Reserve Bank of India. On the other hand, SEBI is responsible for the regulation of non-government securities.
To build an effective fixed-income investment strategy, you must know the details of various investment options to include. Let us dig into the details.
There are a variety of fixed-income investments. Let us have a look at some popular investment options:
Exchange-Traded Funds (ETFs) are baskets of securities that you can buy and sell on the stock exchange on a daily basis. These funds are linked with indices like Nifty and Sensex. Exchange-Traded Funds can be of assets like equity, bond, or even gold. Their trade values depend on the NAV of the particular asset. For instance, the value of a gold ETF is linked with the actual value of gold. Similarly, the value of a bond ETF moves in sync with the value of the bond.
Debt funds are a way to invest in corporate bonds, Government securities such as treasury bills, and other money market instruments including commercial papers and certificates of deposit.
The investment in these debt securities has a predetermined maturity period. The ‘fixed income’ comes in the form of interest that is assured from the time you put your money in. However, even though debt funds offer good returns, they are not guaranteed. Nonetheless, you can easily predict the return and make the investment accordingly. This is what makes this a safe mode of investment for the conservative investor.
Money market funds are a category of mutual funds. As the name suggests, these schemes mainly invest in money market instruments. As per the rules determined by SEBI, it is necessary for these schemes to invest in market instruments with a maturity of up to one year. Money market instruments mainly include treasury bills, certificates of deposit, commercial papers, repurchase agreements, etc.
These schemes are suitable for those people who want to take minimal risk with their investments. Being short-term investments, these are not affected much by the interest rate changes. The low-risk factor associated with money market instruments makes investing in them relatively safe.
You can choose to invest exclusively in Government-backed investment opportunities. These come with a sense of security that the amount invested will furnish returns. Some of thes popular options include:
- Public Provident Fund
- Pradhan Mantri Vaya Vandana Yojana (PMVVY)
- Voluntary Provident Fund
- Listed PSU Bonds
- Sukanya Samriddhi Yojana (SSY)
- Senior Citizen Savings Scheme
Learn more about the fixed-income investment options on the
Now that you have a better idea of where to put your money, let us see the benefits that fixed-income securities offer in terms of risk and return.
Fixed income securities offer an opportunity to earn predictable income by way of interest and repayment of principal. The interest rate on debt securities remains fixed. They are issued by qualified entities that own movable and immovable assets, creating a sense of safety for the investors.
Investing in fixed-income securities benefits investors as it allows a steady growth in the capital while also providing a regular income in the form of interest. The earnings can be reinvested, further compounding the wealth of the investor.
Debt securities show less volatility than other financial securities. Because of this, it promises more security. Moreover, investors can further neutralise risk by investing in Government securities, which are generally considered risk free.
Adding some debt securities to your portfolio helps in better diversification by balancing out the high-risk investments such as equities. This helps in reducing the overall risk associated with the portfolio.
RBI and SEBI control the fixed income market, making all investments very low-risk. The nature of the fixed income market is highly liquid, allowing investors to access and withdraw funds as and when they need them quickly. The main purpose of this investment is to provide stable returns even in times of market inflation and unfavourable economic conditions.
However, two main risk factors are involved with fixed-income investments– interest rate risk and credit risk.
Interest rate risk arises out of fluctuations in the interest rates. If the rates come down, the price of the security goes up. On the other hand, if Government interest rates rise, bond prices fall, resulting in an opposite reaction compared to the former investment option.
Credit risk arises in a situation where the issuer of the bond defaults on making interest or maturity payments to investors due to losses or a cash crunch. This also results in a fall in the price of the asset.
The experts at TejiMandi analyse your risk profile and help you build a strong fixed-income investment strategy. Learn how to calculate the risk of your portfolio.
Being risk-averse should not stop you from investing to grow your wealth. Fixed-income investments are the perfect option to channelise your savings in stable and secure options that provide continuous returns while building a financial backup.
Keep in mind to include such instruments in your portfolio to improve diversification. This will allow you to venture into a variety of investments and strategically increase your overall returns.