Time to look at Fixed Income Investments
Last week when Russia decided to stop the gas supply to Poland and Bulgaria in a bid to escalate its conflict with Ukraine led to a sharp decline in the global markets. This has been a repeating occurrence since the war started and the ongoing volatility in the equity markets due to the global war crisis and hiked interest rates by the fed has made the equity market unattractive and has kept the investors on the edge for the past few months.
Further, the recent announcement by the central bank to increase the repo rate and cash reserve ratio saw an immediate response in the bond market which rose from 7.12% to 7.378%. The increased interest rates to curb the rising food inflation will likely result in higher home and car loans. The hike in repo rates will also push the FD rates as banks will look to retail to meet their cash reserve requirements.
Fixed Income Securities
With the prospect of an upward trajectory in fixed income securities, it is the right time for investors to include them in their portfolios. Before the rate hikes, some finance experts were advising short-term debt funds but now, the fixed asset class is a must-have. Investopedia explains Fixed-Income securities as debt instruments that pay a fixed amount of interest — in the form of coupon payments — to investors. The interest payments are typically made semiannually while the principal invested returns to the investor at maturity. Bonds are the most common form of fixed-income securities.
High Bond Yield
A bond, government or corporate is a financial instrument used by institutions and enterprises to raise funds to finance projects and meet capital expenditure. An increase in interest rate by the central bank makes it costly for enterprises to borrow from banks making bonds more attractive. Currently, the domestic credit to the private sector stands at 55% which is relatively below the world average of 148% and there has been an increasing gap in demand and supply of credit in the domestic market, especially in the MSME segment. The shift of investors towards the bonds could fill in the said credit gap making the private sectors function to their full capacity and yielding high returns to the bonds making it more lucrative for investors.
Good Vs Bad Fixed Income Securities
As an investor you have to be extremely careful while purchasing the bonds as not all the bonds are created equally. Based on the financial performance and viability of the issuer entity, bonds are rated by credit rating agencies — rating them on the basis of the entity’s creditworthiness and its the ability to repay ranging from AAA (highly safe) to D (highly risky or on the verge of default). Also, there are junk bonds issued by very low credit rating entities which do not receive any investment grade but have very high yield rates due to the risk factor involved. Therefore, as an investor, you need to balance out your needs and select the bonds accordingly.
Where to invest? (Source: groww.in)
Bond exchange-traded funds mainly operate by investing in various debt securities available in the market, which generate regular and fixed returns. As such, they guarantee stability as returns are provided periodically at a fixed rate of interest. Fixed-income securities are popular among retired and risk-averse investors, who prefer stability over gaining market advantage.
Debt Mutual Funds
These funds use the accumulated corpus for investment in various types of fixed income securities, such as corporate and government bonds, commercial papers, money market instruments, corporate bonds, etc.
The main advantage of debt Mutual Funds is that they offer a higher return in comparison to standard savings schemes such as fixed deposits and savings accounts maintained with banks or other financial institutions.
It is one of the most common types of tool in the list of fixed income securities, issued by companies to fund the day-to-day operations to ensure a smoother production run.
Since fixed-income bonds pose a liability for the issuing organization, it has to be redeemed as soon as the company generates adequate revenue.
Money Markets Instruments
Specific money market instruments such as treasury bills, certificates of deposits, commercial papers, etc. are offered as investment avenues at a fixed rate of interest, and hence, are classified under fixed income securities. They are offered for a short period of time, with a maturity period that usually does not exceed a year.
However, such fixed-income bonds in India are sold over the counter, and hence, are not accessible to standalone investors. It can only be purchased through money market Mutual Funds.
Bank Deposit (Fixed)
Commonly known as fixed deposits or FD, these tools are one of the most secure forms of investment. These fixed-income securities can be availed for both short and long tenures, depending upon the investor.
However, money invested in bank deposits cannot be withdrawn before its maturity period. In case of emergencies, premature withdrawal can be made, but against a penalty.
Public Provident Fund
Investing in such securities is beneficial as these are exempted from tax deductions, and offer a higher interest rate than regular savings schemes. It has zero risks associated with it as a Central Government sponsored scheme.
Senior Citizen Savings Scheme
These fixed-income bonds aim to provide financial security to the senior citizens of India. Any person aged 60 and above can invest their funds under this scheme, which is subject to a substantial interest rate fixed by the ministry of finance.
Bonds of Listed Public Sector Units (PSUs)
One of the most popular types of fixed income securities, these funds attract high returns as they are offered by top-performing public sector units of the country. They are associated with negligible risk.
As a prudent investor, you must have fixed-income securities in your portfolios to meet your financial goals. It would serve you right in times of crisis and volatility like the one we are currently riding in, it would turn the tide in your favour by balancing out the stress created in the equity asset class. Presently, central banks raising interest rates across the globe has provided the opportunity to get into this market and acquire some medium and long-term high-yield bonds for stable income.
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