What is Fixed Income?
Fixed income is a type of investment. Regular income is received at regular interims and at reasonably foreseeable levels in fixed income. Fixed-income investments are very useful to expand one’s portfolio, because they present less risk than equities and derivative investments. Fixed-income investments provide the dependable returns, so the retired peoples generally prefer to invest in them.
In short Fixed Income is a strategy, ‘fixed income’ in portfolio building refers to an investment style that generates long turn and foreseeable returns. Returns can be generated from low risk securities that pay dividends and interest. It includes investing in Bond, FD, NCD, and FMP which offers low but safe returns for investors.
Why Fixed income investment should be considered?
Its not necessary you would be able to earn till you are alive. There will be a time when you must get retire and at that time this kind of fixed income options provides you regular income. So that you don’t have to be dependent on someone.
Let’s discuss all these safe returns assets in details.
- A bond is a fixed income investment. In bond investor loans money to corporate or government entities. These corporate or governmental entities borrow the funds for a defined period at a variable or fixed interest rate. Sometimes companies, municipalities, states and government use Bonds to raise money and finance a variety of projects and activities.
- For the issuer, owners of such bonds are called debt holders, or creditors.
Characteristics of Bond –
- Each Bond has a Face value. It is the amount the bond will be worth at its maturity. When calculating interest payments, the issuer considers the face value, no matter on how much premium or discount the bond has been bought by the investor.
- The second term in Bond is Coupon rate. It is the rate of interest the investor gets on the face value of the bond; it is mostly expressed as percentage. For example, a 10% coupon rate means the issuers will pay 10% X 1,0,0000 INR = 10,000 INR to the bond holder.
- Then the third term is Coupon date. It is the date on which the bond holder gets interest payments, mostly yearly or half yearly.
- The forth term is Maturity date. It is the date on which the bond is mature and bond holder gets the face value of bond by issuer.
- The fifth term is Issue Price. It is the price at which issuer sells his bonds.
FD (Fixed Deposit):
- Fixed Deposit in its short form FD is provided by banks. It offers investors a higher rate of interest than regular saving accounts, till the given maturity date.
- There are options MIP (monthly interest payment) and QIP (Quarterly interest payment), where interest on principal amount is paid to the investor regularly on Monthly or Quarterly basis.
- In case of premature withdrawal of FD bank will levy a penalty of 1%, on the applicable rate. However, penalty for premature withdrawal will not be applicable for FDs booked for a tenor of 7-14 days.
- Here, the liquidity is ground level compare to liquid funds. Banks gives higher rates of interest than saving accounts as compensation for the slow liquidity flow.
NCD (Non-Convertible Debentures):
- NCD is a financial instrument, mostly for long- term. Non-Convertible Debenture acknowledges a debt obligation towards the issuer.
- Mostly, debentures are of two types. The first which can be converted in to shares after some pre-decided period while the second is which can’t be converted in to shares or equities- they are called Non-Convertible Debentures.
For example: Recently Shriram Transport Finance Company Ltd has issued NCD. The company offered coupon rates up to 9.4% depending on the tenures- 03 years, 05 years and 10 years. Issue price of that NCD was RS.1000 per NCD and market lot was 10 NCD. So, there would be minimum 10,000 investment required. In this way NCD provides fixed income.
FMP (Fixed Maturity Plans):
- FMP is one kind of mutual fund. FMPs are so conventional and that’s why investors prefer FMPs to FDs now days.
- FMP is a debt fund with close end and fixed maturity period. Investors can’t subscribe it on a continuous basis like other open-ended debt funds. Some fund houses offer FMP with new fund offer for a pre-decided period which has opening and closing date, investors can invest their money in it during given period only. The offer ends on the closing date like expiry, after that date none can invest.
- FMP offers indicative returns, restricted liquidity and provides options like dividend option (DDT tax), and growth option (tax on capital gains).
- FMP is riskier than FD but is best option for investor who wants higher returns than FD. In comparison to equity funds FMP has low risk.