What are Fixed Income Securities?
Fixed income securities refer to debt instruments that offer a fixed interest income on your investment. The corpus value that one will get post maturity of the securities is known in advance. Because of this, risk-averse investors prefer fixed income securities over market-linked securities; these securities are apt for people who want to earn steady returns as well.
Also, some of the fixed income securities like government bonds, treasury bills are backed by the government which ensures minimal chances of default.
Why invest in Fixed Income Securities?
If your financial goals involve earning steady returns coupled with low risk, fixed income securities are the best investment option available in the market. Compared to investment in equities, returns from these securities might be low but they are guaranteed.
If you’re an active investor, investment in fixed income securities will diversify your portfolio and yield returns even during turbulent market swings. This reduces the overall risk of the investment portfolio.
Some of the fixed income securities in India have tax saving options available, which serves as another incentive for investment in these securities.
Types of Fixed Income Securities
- Debt Mutual Funds
Debt Mutual funds pool in resources from investors and invest the corpus primarily in various debt instruments such as bonds, fixed income securities,etc. Investment in these instruments ensures fixed returns for the investor. Also, these funds invest in debt securities with good credit ratings. The chances of default of payment on these securities are minuscule.
Compared to equity-oriented mutual funds, debt funds are relatively less risky, therefore perfectly suitable for risk averse investors.
Bonds are fixed income securities that are issued by corporations and the government, to raise money for business expansion or financing new projects. They are issued at a discounted price on their face value and can be traded in the secondary market. Thus, an investor earns guaranteed profit, as the bonds are redeemed at the face value upon maturity.
- Bank Fixed Deposits (FD)
Bank fixed deposits are one of the most popular investment options available in India. A fixed deposit account essentially offers fixed interest rate on your principal investment. This fixed-income security is offered by almost every scheduled bank in India. Numerous investors in India have availed the benefits of Bank FD.
An investor makes a lump-sum principal investment that earns interest during the deposit period. At maturity, the investor gets the principal and the accrued interest.
Different banks provide fixed deposit accounts with different maturities. Investors can opt for FD accounts with maturity period ranging from 7 days to 10 years.
- Treasury Bills
Treasury bills or T- Bills are issued by the Central Government for raising money. They have short term maturities with highest up to one year. Currently, T- Bills are issued with 3 different maturity periods, which are, 91 days T-Bills, 182 days T- Bills and 1 year T – Bills.
T-Bills are issued at a discount to the face value. At maturity, the investor gets the face value amount. This difference between the initial value and face value is the return earned by the investor. They are the safest short term fixed income investments as they are backed by the Government of India.
- Recurring Deposits
Recurring deposits are similar to SIP Investment in Mutual funds. An individual deposits a small amount of money as a monthly installment for a fixed duration that ranges from 1 year to 10 years in a recurring deposit. The interest rate is the same as that of fixed deposits.This enables retail investors with small amounts of money to generate a good corpus of wealth in the long run.