If you’re looking for a steady stream of income with less risk than stocks, fixed income investing might be for you. Fixed income is an investment approach focused on preserving capital and offering a reasonably steady stream of income. In this blog, you’ll learn more about fixed income investing and how it can help you meet your goals.
Traditional fixed-income investment avenues include Public Provident Fund (PPF), National Savings Certificate (NSC), Post Office Deposits, Bank Fixed Deposits, etc. These investment options are mostly preferred due to the safety net they provide.
So the question is, why look at alternate options?
- Even though traditional products like PPF, NSC, etc., offer excellent principal protection mechanisms, the return on investment is still lower.
- While certain asset classes like equity & crypto provide excellent capital appreciation opportunities, it also brings high-risk levels.
- Alternative fixed-income investment opportunities like corporate bonds, debt mutual funds, etc., provide superior yield return opportunities (vis-à-vis traditional fixed-income products) and lower downside risk (as against aggressive options like crypto).
Let us delve a little deeper into some of the exciting higher-yield fixed income opportunities.
- In simple words, bonds are a debt instrument issued by the borrower indicating the amount borrowed from the lender.
- Bonds can be issued by various agencies like the Government, State Governments, PSUs, Corporates, etc.
- Borrowers issue bonds under schemes like fixed interest rate bonds, variable interest rate bonds, covered bonds, market-linked debentures, etc.
In July ’21, RBI has opened the doors for retail investors to invest in Government securities. While detailed guidelines on this are awaited, this is a clear pointer that alternate fixed income investment opportunities are opening up.
Corporate Bonds yields are much higher than Government securities aiding higher wealth creation opportunities. The Corporate Bond market stands at approximately ₹36 lakh crores (as of Jun’ 21) and has grown at a CAGR of 15% over the past 10 years. This provides ample depth and choice of investment opportunities within this asset class.
Direct investment into corporate bonds provides the opportunity to invest directly into the entity without paying additional management fees.
Also, certain corporate bonds are issued in the form of covered bonds, which improves the instrument’s overall security structure, improving the safety net. Certain securities are issued as Market Linked Debentures providing, an efficient tax structure.
Debt Mutual Funds:
- Debt Mutual Funds provide an option to invest in pre-defined schemes of the Mutual Funds with an opportunity to invest in government bonds, corporate bonds, etc.
- The risk level varies with the MF scheme and the nature of holdings.
- The advantage of investing in these schemes is that these funds are typically actively managed (asset manager actively monitors the portfolio) and help diversify your portfolio with a wide range of securities rather than taking individual exposure to a single security.
- To meet the management costs and underlying expenses, a percentage of the portfolio value is charged as TER (Total Expense Ratio). In addition, few schemes levy a fee at the time of entry (entry load) and at the time of selling (exit load) the investment.
Money Market Instruments:
- Money Market Instruments are short-term securities with maturity typically within one year.
- These include Treasury Bills, Commercial Papers, Certificate of Deposit, Call Money, etc.