Fixed-income securities are popular among investors who are risk-averse and expect guaranteed returns. Some investors also invest in these securities to diversify their portfolio for a healthy mix of equity and debt funds.

Here is your guide to everything you want to know about fixed-income securities.

Definition and Benefits

Fixed-income securities are investment options that offer assured and a fixed rate of return over a predetermined period. 

You can avail of the following benefits from investing in these securities:

• They are low-risk as they are not vulnerable to market volatility.

• They provide consistent returns and steady interest income.

• The exit option is usually hassle-free, making them more liquid than market-linked instruments.

• Your investment is secured as the issuer is liable to pay you first in case of bankruptcy.  

Types

1. Traditional Options

Bank Fixed Deposits (FDs), Public Provident Fund (PPF), Pradhan Mantri Vaya Vandana Yojana (PMVVY), National Savings Certificate (NSC), and Senior Citizens Savings Scheme (SCSS) are a few fixed income securities in which people have been investing since decades. 

They provide regular interest payouts, irrespective of market fluctuations.

2. Bonds

Bonds are issued by government or private companies for a specific purpose. Investment in bonds is a guarantee to receive a fixed interest rate, principal at maturity, or repayment at face value.

There are two types of bonds – secured (example: mortgage bonds, equipment trust certificates) and unsecured (example: treasury bills, corporate bonds). 

3. Debt Mutual Funds

These funds pool money from various investors and invest it in government bonds, money market instruments, commercial papers, and other cash assets. These funds are ideal for investors who want to trade cautiously in the market without compromising on stability and returns.

Debt mutual funds provide less return than equity funds but comparatively better returns than traditional fixed-income securities.

4. Debt Exchange-Traded Funds (ETFs)

Debt ETFs are listed and traded on the stock exchange. They are passive investment instruments governed by the Nifty, S&P, and BSE Sensex indexes. You can trade them in the cash market like any company stock.

These ETFs give you balanced exposure to the stock market through diversification. 

5. Money Market Instruments

Money market instruments such as commercial papers, certificates of deposits and treasury bills have a maturity period of up to one year. These instruments have high liquidity and carry negligible risk.

Money market instruments are ideal to meet short-term goals.

Risks

Though fixed income securities are low-risk and give predictable returns, they are subject to two risks:

• Credit/Default Risk: This may arise when the fixed income security issuer fails to make the interest or principal payment. Hence, you should invest only in securities with high credit ratings.

• Interest Rate Risk: The prices of fixed-income securities have an inverse correlation with interest rates. For example, bond price falls when the interest rate goes up.

The best way to eliminate these risks and make the most of your investment in fixed-income securities is to seek professional expertise. Ajmera x-change is a reliable online investment broker and financial services platform. Our experienced team can help you invest in the right securities as per your investment goals.