What are Fixed Income Securities?
Fixed income securities are a group of debt instruments that provide fixed returns. These can be in the form of regular interest payments or repayments of the principal when the security reaches maturity. They are issued by a government, corporation, or other entity to finance and expand their operations. Investors in fixed-income securities are typically looking for a secure return on their investment.
Types of Fixed Income Securities
- Bonds - Governments and Corporations(Issuer) issue bonds to the market (general public, mutual funds, etc.) in order to raise money to fund their projects. The issuer promises to pay back the principal amount invested in the bond along with the interest payable at regular intervals.
- Fixed and Recurring Deposits - You are probably familiar with these terms. Fixed and recurring deposits with a bank give a certain rate of interest. They can help save tax if invested for a long period of time.
- Company Fixed Deposits - Company Fixed Deposits are offered by Financial and Non-Banking financial companies (NBFCs). The deposit is placed by investors with companies for a fixed term carrying a prescribed rate of interest
- Fixed Maturity Plans or FMPs- FMPs are close-ended debt mutual funds with a pre-determined tenure and rate of return. Their maturity period can be from 1 month to 5 years
- National Savings Certificate-The National Savings Certificate (NSC) is a fixed-income investment scheme that you can open with any post office. As a government-backed tax-saving scheme, the principal invested in NSC qualifies for tax savings under Section 80C of the Income Tax Act up to Rs 1.5 lakhs annually.
- National Pension Scheme - The National Pension Scheme is a social security initiative by the Central Government. This pension programme is open to employees from the public, private, and even the unorganised sectors except those from the armed forces.
- Treasury Bills or Government Securities
Risks Associated with Fixed Income Securities
- Inflation risk – that the buying power of the principal and interest payments will decline during the term of the security
- Interest rate risk – that overall interest rates will change from the levels available when the security is sold, causing an opportunity cost
- Currency risk – that exchange rates with other currencies will change during the security's term, causing a loss of buying power in other countries
- Default risk – that the issuer will be unable to pay the scheduled interest payments or principal repayment due to financial hardship or otherwise
More On Fixed Income Securities
There are many fixed-income derivatives such as interest derivatives, credit risk derivatives, etc. There are many fixed income products such as Bonds ETF and Debt Mutual Funds. These fixed income instruments are for ones who have a low-risk appetite and want a fixed regular income.
If an investor isn't able to conveniently able to liquidate or monetise when the need arises, that would make it a bad decision. Fixed Income Investors need to give weightage to their priorities and needs over the rate of return since most fixed income securities have a prolonged maturity period.
One needs to know that fixed-income products aren't bullet-proof and they have their own risks attached to them. To read more on how Franklin Templeton had to shut its six debt mutual funds, click here.