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Why fixed income investments are a smart bet

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In a world where nothing is certain, an investment strategy that assures steady and fixed income, while preserving your capital, is a sound plan. Even without the current pandemic, war, disruptions to the global supply chain and worldwide uncertainty, there’s good reason to invest in fixed income investment products, because it acts as secondary income with high yielding interest.

In India, investing in the fixed income space is a relatively new concept as compared to the Western markets. Although the space was dominated by institutional investors initially, today with greater opportunities and access, individual investors are also equally involved. Contrary to popular perceptions, fixed income investments are not just for the conservative investor or for those seeking safe retirement investment avenues. Investments like bonds, exchange traded funds (ETF), debt funds and money market funds play an important role in building a balanced and resilient portfolio. Whether you are an aggressive investor looking to park surplus funds for short- to mid-term, or a professional looking to diversify your portfolio, fixed income investments are a smart bet.

Safe and steady

Stock markets are prone to volatility. Despite the global economy looking at a recovery after two years of COVID-19 pandemic, the first quarter of 2022 was the worst period in two years with the Dow and S&P 500 closing down 4.6% and 4.9%, respectively and the Nasdaq down over 9%.

Fixed income investments are the answer for investors looking to offset their losses and build a more robust portfolio. These products, typically, are not affected to a large extent by geopolitical happenings and economic downturns, as a result of which they are considered safer than most other investments.

Fixed income investments have a low correlation with equity. In other words, the value of your investment is not linked to stock market performance. The bank Fixed Deposits (FD) rates, for instance, will not fall because the stock market has crashed. In that sense, fixed income investments provide stability to your portfolio by offsetting any losses.

Fixed income securities generate a regular stream of cash flows for the investors. Further, the amount and timing of these cash flows are also known in advance, helping the investors to plan their finances.

However, it’s important to note that fixed income products are not completely immune to market risks. These products can also be affected by interest rate changes (a rise in interest rates could mean a fall in bond prices), default risk (bond issuer is unable to pay interest and principal amount) and credit risk in the case of corporate bonds. A smart investor will, therefore, look to balance their portfolio with fixed income products, as per their risk appetite.

Options galore

Government and corporate bonds are some of the classic fixed income investments, while FD and Recurring Deposits (RD) are perhaps the most well-known. However, today, there are many more fixed income investment options to choose from for the discerning investor. Here are some of the best choices:

#Sovereign guaranteed fixed income options: They provide a regular income in the form of interest payments. The principal amount is paid back on maturity along with the final interest payment.

The investment products guaranteed by the government have traditionally been an attractive prospect for investors. The reason investors like these products are because they are considered safe, and, more importantly, come with a sovereign guarantee. The products offered by the government include Government Securities (GSecs), State issued Bonds called SDLs (State Development Loans), bonds issued by PSUs, RBI Floating rate Bonds., Public Provident Fund (PPF) and Sukanya Samriddhi Yojana and Senior Citizens Savings Schemes, to name some.

#Corporate Bonds

Corporate bonds, on the other hand, are issued by a company to raise finances and is a form of debt security that investors can purchase. Bonds are essentially a loan to the government (or a company in case of corporate bonds). Corporate bonds provide a higher rate of interest, but also come with higher risk. They can be positioned as investments that are safer than equity and give higher returns than traditional Bank FDs.

#Debt Funds: These are mutual funds that invest in government and corporate bonds and other fixed income securities, that offer capital appreciation. While investors have to pay a small fee, the benefit of debt funds is that they are professionally managed, provide a steady and regular income, are safe, and have high liquidity. However, there is no guarantee on their projected/future returns.

#Money Market funds: These are a type of mutual funds that, as the name suggests, invests in money market securities which are highly liquid, short-term and fixed income debt securities. They are professionally managed and invest in cash and cash equivalents, treasury bills, commercial papers, short-term government bonds and securities.

#Exchange Traded Funds: Fixed income ETFs are professionally managed and much like ETFs they are traded on the stock exchange and move with the index they are set up to track. Fixed income ETFs invest in government and corporate bonds. Instead of buying individual bonds, fixed income ETFs allow an investor to buy a diverse portfolio of bonds in the form of units. Fixed income ETFs may also provide more regular payouts as they comprise a wide variety of bonds with different payout dates.

When it comes to borrowed capital, bonds and debentures may seem alike, but the biggest difference is in the nature of the instruments. A bond is backed by collateral, while a debenture is not – although they provide a high scope of getting bigger returns in less time. If you have the ability to gauge the creditworthiness of the provider of the debentures, they can make for a great investment. However, if you are new to the field of investment or your risk appetite is low, then bonds are a better choice.

Given the current global scenario, it’s safe to assume that rising inflation and volatile markets are here to stay – at least for some more time. With many investors seeking stability, this is the perfect time to look at fixed income investment products.

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Views expressed above are the author’s own.