Classification of Fixed Income Securities based on the Type of Issuer

If you invest in the Indian financial market, you must ensure you maintain a proper balance of your portfolio. Investing into a single asset class is a risky venture. Hence, diversifying your investments across assets as it allows a steady income and avoids dependence on just one asset class. In this case, fixed-income securities play an essential role. In this blog, you will understand fixed-income securities and their classification based on the type of issuer.

What are Fixed Income Securities?

As the name suggests, fixed-income securities give fixed and predictable returns, which is why they are trendy among conservative investors who look for stable returns. Because fixed-income securities generate periodic returns, they constitute a liability for an entity that introduces them into the market. As a result, the interest payable on these instruments is constant irrespective of the market conditions. 

The final value of these instruments at the time of maturity is calculated before they are issued. That means investors can know the amount they will get on maturity at the time of investment. 

Classification of Fixed Income Securities based on the Type of Issuer

  1. Government Bonds

Central and state governments issue debt instruments to fulfil their needs and manage the money supply. These bonds are issued when the government needs funds for developing infrastructure. In exchange, the government pays the investors back common interest and the principal amount on maturity. These bonds are issued under the Reserve Bank of India (RBI) supervision. These bonds are known as risk-free as the investors get a sovereign guarantee, and the chances of default are rare. At the same time, these instruments pay less interest since they include less risk. In India, Government Bonds have the largest market share in the fixed-income market. Types of government bonds include Treasury Bills, Cash Management Bills, Dated Government Securities, Fixed- Rate Bonds, Floating Rate Bonds, Zero Coupon Bonds, Sovereign Gold Bonds, 7.75% GOI Savings Bond etc.

  1. Municipal Bonds

They are also known as ‘muni bonds’. It is a debt instrument issued by city corporations and other associated bodies in India. Whenever the local government body needs funds, they issue municipal bonds. These instruments have a fixed maturity period, and investors earn fixed interest rates. Also, short-term bonds are available with a maturity of one to three years, and long-term municipal bonds have a maturity of up to ten years. In addition, these bonds have some tax advantages for investors. For example, governmental entities issue a general obligation bond (GO). It is not backed by revenue from a particular project but by the credit and taxing power of the issuing jurisdiction. Municipal bonds are a safe source of investment because they have specific revenue sources to secure them. The first municipal corporation to raise money through these instruments in Southeast Asia was the Ahmedabad Municipal Corporation, which raised Rs. 100 crores in 1998. 

  1. Corporate Bonds: 

Corporations issue this debt security to raise funds for their operations. The making of Repayment of such bonds in the entire principal or interest earned over a specific period. Corporate bonds provide a higher rate of interest compared to government bonds, and these bonds are generally short-term investments. Hence investors can reap the benefit within a short period. However, the performance of these bonds depends on the revenue and profitability of the companies that issue these bonds. In addition, corporate bonds are riskier than government bonds because, here, the investors don’t get sovereign guarantees, and the returns depend on the company’s earnings. Types of corporate bonds can be Zero- coupon, convertible, floating-rate, fixed-rate, investment-rate, and junk corporate bonds.

  1. Securitized Debt: 

Securitization is the process of monetizing illiquid loan assets of a lender, including a bank, into a liquid pool of tradable assets. It is achieved by creating a Special Purpose Vehicle (SPV) and structuring the loan pool into tradable bonds. These securities transfer the ownership of assets, including loans and receivables, to the SPV. Types of securitized debt instruments include mortgage-backed securities (MBS), asset-backed securities (ABS) etc. 

Last Words

Although the bond market may appear complex for an investor, a bond is a fixed-income investment that is comparatively less risky than equity. Therefore, bonds are an excellent option to diversify the portfolio and get a stable income. 

Frequently Asked Questions (FAQs):

What are Bonds?

Bonds are debt instruments that help the government or corporations raise money from the public to fund their respective projects. 

What are short-term and long-term bonds?

Short-term bonds have a maturity of one to three years, while long-term bonds have a maturity of more than three years.

Is bond a good investment in 2023?

Yes, bonds are good to diversify your portfolio as returns from the bonds are twofold. First, you can earn periodic interest from the bonds and gain capital appreciation by selling them in the secondary market. 

Investments Principal at Wint Wealth

Anuj is an investment professional with a demonstrated history of working in Debt Capital Markets. He has completed his B.Com (Hons) in St. Xavier’s College, Kolkata and holds PGDM (Finance) degree from GIM. He is currently working as Investments Principal at Wint Wealth. He has been working in the debt capital market space for the past 4+ years and is also an NISM certified mutual fund expert.

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Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The article may also contain information which are the personal views/opinions of the authors. The information contained in this article is for general, educational and awareness purposes only and is not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision, whether related to investment or otherwise, taken on the basis of this article.

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