Classification of Fixed Income Security Based on Maturity

Fixed-income securities are debt instruments that provide returns in the form of predetermined interest payments; As soon as the bond expires, the principal is reimbursed. Hence, investors know the corpus value they will receive at the time of maturity of their investments.

Fixed-income securities are a liability for the issuer in the market, and the interest payment of a fixed-income security depends on the issuer’s reputation. As a result, this kind of investment is popular among conservative investors with less risk appetite. 

Classification of Fixed Income Security Based on Maturity:

Depending on the need for funding, firms or the government may issue various maturities and the demand for bonds among investors. Long-term bonds are costlier than short-term loans since the funds are locked in for extended periods, and the investors may suffer from liquidity. The Classification of bonds in terms of maturities, such as ultra-short-term, short-term, medium-term and long-term. Short-term borrowings are mainly from the working capital requirement; on the other hand, the usage of long-term funds for projects, capital and infrastructure. Collective investment schemes also create debt-oriented funds with such maturities. The returns on bonds by similar rating classes of issuers may also vary based on maturity, which forms the basis of yield curve theories.

  1. Overnight Debt/ Borrowings: 

These securities mature every day. The banks borrow overnight funds from the money market and the RBI to ensure the banking system remains stable and liquid.

  1. Ultra Short-Term Debt (Money Market): 

It is a short-term debt instrument issued by corporations to raise funds for a short term of up to one year. Money market instruments such as Commercial Papers (CP), Certificates of Deposits (CD), Treasury Bills (TB), and Cash Management Bills (CMB) come under this category. 

  1. Short-Term Debt: 

This category includes bonds with a maturity of 1-5 years, while bonds maturing within a year come under ultra short-term debt. Example of short-term debt includes T- Bills, CDs, government bonds etc.

  1. Medium-Term Debt: 

These bonds are intermediate since they mature in 5-12 years, more than short-term bonds and less than long-term bonds.

  1. Long-Term Debt: 

Mostly, government bonds come under this category with a maturity of more than 12 years. 

Features of Fixed Income Instruments:

  1. Interest: Fixed-income instruments provide fixed returns through interest payments.
  1. Low Risk: These instruments are less riskier and ideal for low-risk tolerance investors.
  1. Predictability of Returns: An investor can predict the returns of a fixed-income instrument because the interest rate is fixed. At the same time, the predictability of returns is not possible in equity or any other market-related investment options.
  1. Rate of interest: Fixed-income instruments provide a higher rate of interest than savings accounts.
  1. Tax: The taxation of fixed-income instruments is similar to debt funds. Short-term capital gains are taxed based on your tax bracket, and long-term capital gains are taxable at 20% with an indexation benefit. Interest from such instruments is taxable as per the investor’s tax slab rate.

 Things to consider before investing in Fixed Income Securities:

  1. Secured/Unsecured: 

There are two types of bonds.- secured/unsecured. A secured bond provides collateral on the raised loan, and the assets are transferred to the bondholders if the bond issuer defaults on the payment. While in the case of unsecured bonds, the issuer does not pledge any asset and is riskier comparatively.

  1. Coupon Rate: 

The coupon is the predetermined interest paid on fixed intervals. The coupon rate may vary for different bonds, and you need to check what works for you.

  1. Maturity: 

Maturity is when the bond issuer is liable to pay back the bondholders the bond’s principal amount. The maturity can be 1-5 years, 5-12 years and can be more than 12 years. Investors should select a bond based on their financial goals.

  1. Taxes: 

Some bonds available provide tax exemption, such as green, municipal, and government bonds. However, they need more interest. 

  1. Liquidity: 

In the case of default, a company repays its investors in a predefined order. After the company sells its assets, bondholders get a preference over stockholders and get paid the outstanding money first.

Frequently Asked Questions (FAQs):

Is fixed-income securities a good option to invest in?

Fixed-income securities can be an excellent option if you are a conservative investor seeking regular returns from investments or want to diversify your portfolio to a safer option.

Which is the most popular kind of fixed-income security?

The most popular fixed-income security is a bond that corporations and the government issue. However, many other money market instruments, asset-backed securities, preferred and derivatives  exist.

What are some examples of fixed-income securities?

Treasury bonds and bills, corporate bonds, certificates of deposits (CDs) and municipal bonds are some examples of fixed-income securities. 

What is the classification of fixed-income securities based on maturity?

Fixed-income securities based on maturity can be classified as Overnight Debt/Borrowing, Ultra Short-Term Debt (Money Market), Short Term Debt, Medium Term Debt, and Long-Term Debt.

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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