Fixed Income Securities
Fixed-income securities or bonds are a type of investment wherein you lend money to a government entity or a private corporation for a specific period against a periodic interest payment in return.
As an investor in fixed-income securities or bonds, it gives you a predetermined, regular source of income till its maturity, after which the principal gets returned to you.
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Key terminologies you should know
- Issuer: or entities could be a government entity or a corporation
- Face Value: or principal is the amount the issuer promises to repay the investor on maturity.
- Coupon Rate: or interest, the fixed interest rate on the principal that the issuer pays the investor, which is mentioned in annual percentage terms.
- Coupon Frequency: How frequently the interest will be paid to the investor (annually, semi-annually, etc.).
- Maturity Date: the date when the debt instrument issuer promises to repay the principal.
- Credit Ratings: agencies like CRISIL, ICRA, etc, assess the ability of the issuer to meet the debt obligation.The higher the ratings, the lower the credit risk
- Yield: is the total return on investment that an investor can expect from his investment.
- Liquidity: refers to the ease with which a debt instrument can be bought or sold in the stock exchange without affecting its price significantly.
What are some Key advantages and disadvantages of investing in Fixed income securities ?
Advantages
Steady Income: Debt instruments give the investor a predictable income. This is done through the coupon payments.
Diversification: Is the perfect diversification for equity investors as its correlation with equities is low.
Lower volatility: They bring stability to the portfolio as they are less volatile.
Capital Protection: Investors with lower risk tolerance or shorter investment horizons prefer debt instruments.
Disadvantages
Lower Returns: Historically, they offer lower returns than investing in equities.
Credit Risk: This is a real risk as the issuer may default on their obligations, though it is true in lower-rated securities.
Risk of inflation: Eating into the returns generated by the debt instrument, especially when the inflation rate exceeds the fixed return.
Liquidity risk: Less frequently traded fixed-income securities might not have enough buyers or sellers, which makes exiting them challenging.
How Does Fixed Income Securities Help An Equity Investor ?
Investment in fixed-income securities will help you in the following manner :
Risk Management:
Diversifying a portion of your investment portfolio into debt instruments will help manage your overall risk profile, especially if you are overweight in equities or have a shorter investment horizon.
Rebalancing Opportunities:
When one asset class outperforms the other(equities), selling some of the outperforming assets (equity investments) and reinvesting the gains into the other (fixed-income securities) can help maintain the desired asset allocation.
Capital Preservation:
During periods of high volatility in the equity markets, it is prudent to move some of their capital to safer fixed-income securities to preserve capital.
Fixed income products available with us:-
- Listed Non-convertible Debentures
- Corporate Fixed Deposits
- Sovereign Gold Bonds
- Capital Gains Bonds
Non-Convertible Debentures
Meaning of Non-Convertible Debenture
A Non-convertible debenture is a form of investment for an investor who lends money to a company against interest for a pre-determined period. In other words, it is a loan taken by the company from investors against a periodic interest payment and a promise to return the principal amount on the maturity date
A listed Non-Convertible Debenture are fixed income securities listed in the stock exchange like NSE and BSE.
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Key Features of Listed Non-Convertible Debentures
- Fixed Income: a fixed source of income in the form of interest payment to the investor over the tenure.
- Fixed Maturity Date: a fixed date on which the principal is paid back to the investor.
- Liquidity: since the NCDs we offer are listed on the stock exchange, the investor can sell them there before maturity if required.
- Small Ticket Size: investors can begin investing from Rs 10,000.
- Higher Interest Rate: offer a higher interest rate than FD, postal savings schemes, or similar investments.
- Taxation: the interest earned is taxed as per the investor’s income tax slab. Capital gains from selling them at the stock exchange are subject to capital gain tax.
What are some Key advantages and disadvantages of investing in Listed Non-Convertible Debentures ?
Who Should Consider Investing in Listed Non Convertible Debuntures ?
- Investors keen on diversifying their portfolio can consider investing in Listed NCDs.
- Bank and corporate FD investors can consider NCDs an alternative investment option.
- Investors looking to generate a fixed income periodically.
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Corporate Fixed Deposits
What Is A Corporate FD ?
A Corporate FD is a form of term deposit offered by Financial and NBFCs to raise funds from the public to run their operation. As an investor of corporate FDs, you invest a lump sum amount for a predefined tenure at a fixed interest rate. The tenure of a corporate fixed deposit could last from a few months to a few years.
Key Features Of A Corporate Fixed Deposit :
- Higher returns: Corporate FDs offer a higher interest rate than traditional bank FDs.
- Fixed Tenure: The Investment is for a specific period, from a few months to several years.
- Fixed Interest Rate: The interest rate is fixed for the entire deposit tenure, giving assured returns to the investor.
- Interest Payout: Corporate FDs often have the choice of the frequency of interest payments to the investor, that is, monthly, quarterly, semi-annually, annually, or at maturity.
- Loan Facility: Some corporate FDs offer the option of taking a loan against the deposit, fixed up to a specific percentage value of the deposit amount.
- Taxation: Interest earned is fully taxed as per the investor’s income tax slab.
Who should consider investing in Corporate Fixed Deposits ?
- Investors keen on spreading their investments in various asset classes can consider investing in Corporate FDs.
- Investors looking for higher returns than Bank FD’s.
- Investors looking to generate a fixed income periodically.
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Capital Gains Bonds
What are Capital Gains Bonds ?
A capital gains bonds, also known as 54EC bonds, is a specific instrument available to Indian investors to save long-term capital gains tax from the sale of an immovable property.
Key features of 54 EC Bonds
- Tax Exemption: Investment in 54EC bonds allows an investor to claim exemption from long-term capital gains under section 54EC of the Indian Income Tax Act.
- Maximum investment: through them, a maximum of Rs 50 Lakhs can be invested in one financial year to claim tax exemption.
- Investment Timeline: Investment in these bonds must be made within six months from the immovable property’s sale date.
- Lock-In Period: The lock-in period in these bonds currently is 5 years and cannot be redeemed before it.
- Fixed Interest Rate: The interest rate offered is less than that of other debt instruments and is taxable.
- Non-Transferable: capital gains bonds are non-transferable.
- Backing of Govt entities: have high credit ratings as government entities back them.
What are some Key advantages and disadvantages of Capital Gains Bonds ?
Who should consider investing in 54EC bonds?
- Individuals who have realized long-term capital gains from the sale of immovable property are unwilling to invest in another property in the next 6 months.
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FAQ’s
What are fixed-income securities or debt instruments?
Fixed-income securities are investments where you, as an investor, lend money (to a government entity or a corporation) for a predetermined period against a fixed interest payment. The principal you invest in is paid back to you on maturity.
What key points should I know as an investor in fixed-income securities?
As an investor in fixed-income securities, you should know who is borrowing the money (issuer), their creditworthiness (credit rating), the total amount they will repay at maturity(face value), the interest rate(coupon rate) and how often the interest will be paid to you (coupon frequency).
What are the key advantages of investing in fixed-income securities?
Fixed-income securities are a must-have in your portfolio as they become a steady source of income and help you diversify your investment portfolio. Compared to equities, they are less volatile and help you protect your capital, especially during uncertain times.
What downsides of investing in debt instruments should I know?
The returns offered by debt instruments are lower, and there is a risk that the borrower might not repay (credit risk). The real returns generated by a debt instrument may not be enough to give inflation-adjusted returns. Sometimes, the liquidity is low, making it hard to exit earlier.
As an equity investor, how can investing in debt instruments help me?
Debt instruments help manage the overall risk by helping you balance your investment portfolio. When stocks do well, they give opportunities to help you rebalance your portfolio and help preserve your capital during volatile or uncertain times.
What is a listed non-convertible debenture, and how is it different from a regular fixed deposit?
A listed NCD is a debt instrument issued by companies to raise funds from its investors. Unlike fixed deposits, NCD can be sold by an investor on the stock exchange before maturity, potentially offering more liquidity and sometimes even a higher rate of interest.
What is a corporate fixed deposit?
A corporate FD is a term deposit a company offers investors with higher interest rates than bank FDs. The interest earned is taxed as per your individual income tax slab.
What are Capital Gains Bonds? Who should invest in them?
Capital Gains Bonds or 54EC bonds help save long-term capital gains tax realized from selling a property. If you do not plan to buy a property in the next 6 months from the date of sale, consider investing in capital gains bonds to save income tax. Government-backed entities and AAA-rated bonds back the 54EC bonds and are worth considering despite their lower returns and long lock-in period.
