Fixed Income

Fixed income:

Fixed income refers to a category of investments where the borrower (usually a government or corporation) is obligated to make payments of a fixed amount on a fixed schedule.

Essentially, when you invest in fixed income, you are acting as the lender. In exchange for your capital, the borrower promises to pay you regular interest (known as “coupons”) and return your original investment (the “principal”) on a specific date (the “maturity date”).

Key Components of Fixed Income:

To understand any fixed income security, you need to know these four terms:

• Principal (Face Value/Par): The amount of money you lend the issuer and the amount they promise to pay back at the end.
• Coupon Rate: The fixed interest rate paid to you, usually expressed as an annual percentage of the face value.
• Yield: The actual return on your investment. This can differ from the coupon rate if you buy the security for more or less than its face value on the secondary market.

Common Types of Fixed Income:

1. Government Bonds :

These are loans you give to the Central or State government to fund public projects like roads or hospitals.

• The Safety: They are considered the safest investment because they are backed by a “sovereign guarantee”—the government can raise taxes or print money to pay you back.
• Returns: Usually offer lower interest rates because they are so safe.
• Duration: Typically long-term (5 to 40 years).

2. Treasury Bills :

Think of these as the short-term version of government bonds.

• Duration: Very short-term, with specific maturities of 91 days, 182 days, or 364 days.
• The Twist: They do not pay regular interest (coupons). Instead, they are issued at a discount.

Example: You buy a ₹100 bill for ₹98 At the end of the term, the government pays you ₹100. Your ₹2 profit is your “interest.”

3. Corporate Bonds

These are loans you give to private companies (like Tata, Reliance, or Apple) to help them expand their business.

• The Risk: Higher risk than government bonds because a company can go bankrupt.
• Returns: Higher interest rates to compensate for that risk.
• Ratings: They are rated by agencies (like CRISIL or ICRA). AAA is the highest/safest rating.

4. Non-Convertible Debentures (NCDs)

NCDs are a specific type of corporate bond that cannot be converted into company shares. You are strictly a lender, never an owner.

• Types of NCDs:
  • Secured NCDs: Backed by the company’s physical assets (land, machinery). If the company fails, these assets are sold to pay you. (Safer, lower interest).
  • Unsecured NCDs: No assets back the loan; it’s based purely on the company’s reputation. (Riskier, higher interest).
  • Cumulative: Interest is “stored up” and paid as one big lump sum at the end.
  • Non-Cumulative: Interest is paid out regularly (monthly or annually) to provide you with steady income.

5. Secured Bonds

This is a broad category that includes any bond (including NCDs) that has collateral.

• The “Safety Net”: If you buy a secured bond and the company goes bust, you have a legal “first claim” on their tangible assets.
• Common Examples: Mortgage-Backed Securities: Backed by real estate.
  • Equipment Trust Certificates: Backed by things like airplanes or shipping containers

6. Fixed Deposits (FD)

A Fixed Deposit is a financial instrument where an investor deposits a lump sum with a bank or NBFC for a specific tenure at a pre-determined interest rate.

• The Benefit: It is one of the safest “Cash Equivalents.” Unlike savings accounts, FDs offer higher interest rates because the money is “locked in.”
• Types :

1. a) Government / Bank Fixed Deposits

– Ultimate Safety & Insurance: These are the gold standard for security in India. Public Sector Bank FDs carry implicit government backing, and all bank FDs (including private banks) are insured by the DICGC (RBI) up to ₹5 Lakh per depositor, making them virtually risk-free.

– High Liquidity: They offer the most seamless access to funds. Most banks allow for instant premature withdrawal through mobile apps, making them the ideal choice for an emergency corpus

1. b) Corporate Fixed Deposits

– Yield Enhancement: Corporate FDs typically offer a “spread” or premium of 1% to 2% higher interest than bank FDs. This makes them an excellent tool for beating inflation and boosting the overall weighted average return of a conservative portfolio.

– Credit Rating Reliance: Unlike bank deposits, these are not insured. Their safety depends entirely on the issuer’s financial strength. We prioritize companies with AAA or AA+ ratings, where the risk is mitigated by the company’s robust balance sheet and cash flows.

• Wealth Strategy: We use FDs to provide stability and liquidity in a portfolio, ensuring a portion of the client’s wealth is protected from market volatility.

Benefits:

• Predictable Income: You know exactly how much you will receive and when.
• Capital Preservation: Generally less volatile than stocks, making them a “ballast” for your portfolio.
• Priority in Liquidation: If a company goes bankrupt, bondholders are paid before stockholders.

Risks:

• Interest Rate Risk: When market interest rates rise, the price of existing bonds typically falls.
• Inflation Risk: If inflation rises faster than your fixed interest rate, your “real” purchasing power decreases.
• Credit/Default Risk: The chance that the borrower will be unable to make interest payments or return the principal.

How to Invest:

You don’t have to buy individual bonds (which often require high minimums, like ₹10,000+). Most individual investors use:

1. Bond ETFs: These trade like stocks and give you instant exposure to hundreds of different bonds.
2. Bond Mutual Funds: Professionally managed portfolios that handle the buying, selling, and diversification for you.