Fixed Income Securities: Meaning, Types, Features & Examples

13 min read • Updated 14 September 2023
Written by Anshul Gupta
Fixed Income Securities

Every investor has different needs. For instance, a 24-year-old with a stellar job with no specific financial obligations may intend to invest a significant chunk of his income in long-term, high-growth instruments.

However, not everyone’s circumstances allow a high-risk appetite. For instance, an expecting mother could want a guaranteed corpus at the end of 15 years to fund her child’s higher education. Requirements like these call for investment instruments that can offer fixed returns. This is where fixed-income securities can help.

So, here you’re going to know all about fixed-income securities, their types, examples, features, advantages and disadvantages. Further, you’ll know how to buy these fixed-income products.

What Are Fixed Income Securities in India?

Fixed-income securities are debt instruments issued by government or corporate organizations that offer a fixed return on your investments. There are different types of fixed-income securities including mutual funds, treasury bills, bonds, national saving certificates, etc.

Specific securities even provide periodic returns to create a steady income stream. Due to the fixed returns, many investors prefer these fixed-income instruments in their investment portfolio along with equity and other market-linked instruments.

Key Takeaways

Popular Types – Fixed Deposits, Municipal Bonds, G-Secs, Corporate Bonds.
Benefits – Stable income, Tax benefits, Capital retention.
How to Invest – Direct Investment, Mutual Funds, Banking partners, Secondary Market.
Risks Involved – Credit risk, Liquidity risk, Re-investment risk, Interest rate risk.

Why should you Invest in Fixed Income Instruments?

As mentioned earlier, investors have different needs, risk appetites, and financial goals. Those looking for secure returns without tracking market fluctuations, irrespective of the earning potential, should invest in fixed-income securities.

In such cases, people creating a corpus for a child’s higher education or a family member’s wedding will be most inclined to take minimal risks with their investment. Fixed-income securities will be a suitable instrument for them.

Also, a person who requires a stable income can consider investing in fixed-income instruments. For instance, people nearing retirement must create a source of regular income even when they stop working. They can invest in different types of fixed-income investment options that offer fixed payments at periodic intervals.

For investors with a higher risk appetite, fixed-income securities are an option to diversify their portfolios. To put it simply, including fixed-income securities in your portfolio can be helpful in balancing the risks associated with equity investments.

Types of Fixed Income Securities

Many types of fixed-income investment options are available to Indian citizens. Let’s discuss the different types of fixed-income securities one can invest in:

1. Debt Mutual Funds

These funds pool investors’ resources to invest the corpus in various debt instruments such as bonds, T-bills, and other fixed-income securities.

Read More: Best Debt Mutual Funds to Invest in 2022

2. Treasury Bills

These are short-term fixed-income instruments issued by the government for 91, 182, or 364 days and do not carry any coupon (interest) payments. They are issued at a discount on their face value. 

The face value is paid to the buyer on maturity. For example, a 91-day T-bill with a face value of Rs. 100 could be sold at Rs. 98.4. The gain of Rs. 1.6 is released on receiving the payment of Rs. 100 at maturity.

Read More: Treasury Bill- Meaning, Features, Benefits and More

3. Bonds

Bonds are fixed-income securities that are popular worldwide and offer predetermined returns. They are a standardised and fungible unit of a loan raised by a government or a company for a specific objective. The lenders are the investors who buy the bond, and the borrower is the company or the government issuing it.

4. National Savings Certificates

These are savings certificates you can buy from the nearest post office. They have a fixed maturity period of 5 years and a fixed interest rate. Apart from guaranteed returns, they also offer tax exemptions for investments up to Rs 1.5 lakhs under Section 80C of the Income Tax Act.

Read More: Understanding NSC- National Savings Certificates

5. Money Market Instruments

These below-mentioned instruments comprise fixed-income securities with a maturity period of less than a year:

  1. Certificates of Deposit: A certificate of Deposit is a money market instrument issued by a bank that guarantees repayment of principal along with a pre-specified interest rate. This interest rate may be fixed or floating. A CD has a maturity period ranging from 7 days to one year. Available in only dematerialised form, CDs are governed by the RBI and have a minimum investment amount of Rs.5 lakhs.
  2. Commercial Paper: It is a fixed-income security issued by large corporations to meet short-term liquidity obligations. It is floated at a discount and redeemed at face value on maturity.

Read More: Understanding the Money Market Instruments in India

Examples of Fixed Income Securities 

Let’s understand the working of a fixed-income tool with an example. Mahindra and Mahindra Financial Services Ltd.(M&M FS) launched bonds with a face value of Rs. 1000/- and maturity due in seven years. The coupon rate on the same was 8.53%. The company planned to repay its debt using the bond and generate enough profit in the coming years to repay the bond.

Therefore, if you bought ten bonds, you will be entitled to annual payments of 10 X 85.3= Rs. 853 till the bond’s maturity. These payments are your fixed- income for the next seven years. At maturity, M&M FS repays the bond of 10X1000 = Rs. 10000 to you along with the annual interest. In this period, you earned 7X853 = Rs. 5971/- as total interest

How to invest in Fixed-income securities?

Investing in fixed-income securities entails putting money into debt securities like bonds or fixed deposits, where the investor is basically lending money to the issuer (governments, businesses, or municipalities) in return for recurring interest payments and the return of the principal amount at maturity.

The most popular methods of investing in Fixed Income Securities are:

Direct Investment:

Corporate Bonds: Bonds can be bought from corporations through their initial offerings or the secondary market through trade exchanges.

G-Secs: Government Securities, also known as G-Secs, can be bought directly through platforms such as RBI’s Retail Direct.

Banks:

One of the most popularly sought ways to invest, banks are the most traditional forms of issuers for fixed-income securities.

Trading platforms (Secondary Market):

Bonds can be bought from the secondary market through various trading platforms.

Things to Consider Before Investing in Fixed-Income Instruments

  • Capital Gains Tax: You are liable to pay taxes on the capital gains from your Fixed-Income securities. In the case of long-term investments, they are subject to 20% after adjustments are made for indexation, whereas, in the case of short-term capital gains, they are subject to taxation based on the investor’s income.
  • Mutual Fund Strategies: Mutual funds have different strategies based on how long they plan to invest money. Short-term investments usually focus on buying money market instruments and debt funds from the array of fixed-income securities available. If they look at a longer investment period, they often invest in ETFs.
  • Liquidity: These funds are typically very liquid, meeting the investor’s need for cash whenever it arises.

Advantages & Disadvantages of Investing in Fixed Income Securities

Advantages of Fixed-Income Securities

These are the benefits of investing in fixed-income securities: 

  1. Consistent returns: Returns from fixed income securities are pre-determined. Thus, they offer consistent returns. Moreover, the risk of return fluctuations is minimal due to the lower variance than other instruments. 
  1. Relatively low risk: Since many of these securities are backed by the government, large banks, and corporates, they carry a relatively low risk. However, you should always do your due diligence and check the entity’s profile before investing. 
  1. Diversification of portfolio: As discussed earlier, it has been seen that there has been an inverse relationship between the returns from fixed-income securities and other equity instruments. Thus, adding fixed-income securities to a portfolio balances its risk profile and makes it more weather-resistant.
  1. Higher priority of being paid out in case of bankruptcy: In case the issuer goes bankrupt, the investors in fixed-income securities get a priority in being paid back before the other stakeholders. The senior secured debt holders get paid first, followed by other investors. The equity investors and promoters are the last parties to be paid.

Disadvantages of Fixed-Income Securities

Fixed-income securities are known for their stability and regular income streams. However, like every investment instrument, they also come with several disadvantages:

  • Lower Potential Returns: They often provide lesser potential profits than equities.
  • Liquidity Risk: Some fixed-income instruments, particularly those with longer maturities or worse credit quality, may be difficult to sell rapidly without losing value.
  • Interest Rate Risk: If interest rates increase, the value of these securities may decrease.
  • Credit Risk: Even while this risk is often lower for government assets, the issuer could stop making payments.
  • Reinvestment Risk: Risk exists that interest generated won’t be able to be reinvested at the same rate.

Why should you Invest in Fixed Income Securities?

As mentioned earlier, investors have different needs, risk appetites, and financial goals. Those looking for secure returns without tracking market fluctuations, irrespective of the earning potential, should invest in fixed-income securities.

In such cases, people creating a corpus for a child’s higher education or a family member’s wedding will be most inclined to take minimal risks with their investment. Fixed-income securities will be a suitable instrument for them.

Also, a person who requires a stable income can consider investing in fixed-income instruments. For instance, people nearing retirement must create a source of regular income even when they stop working. They can invest in different types of fixed income investment options that offer fixed payments at periodic intervals.

For investors with a higher risk appetite, fixed-income securities are an option to diversify their portfolios. To put it simply, including fixed-income securities in your portfolio can be helpful in balancing the risks associated with equity investments.

Also Read: Understanding NSC- National Savings Certificates

Risks of Investing in Fixed Income Securities

While fixed-income securities are a more secure investment choice, they are not entirely risk-free. Some of the risks of investing in fixed income securities are:

1. Default risk: Fixed income securities are ultimately an investment in debt or a portfolio of debts. They face the risk of the borrower defaulting on the loan.

One can manage this risk by investing in higher credit-rated securities. A credit rating is basically an assessment of a company’s financial history and its ability to repay borrowed debts.

 2. Interest rate risk:  Most of the time, fixed-income securities prices are inversely related to fluctuations in the interest rates of short-term government securities.

When the interest rates of these securities rise, the existing deposits become less attractive to investors who can earn higher coupons on the new securities.

As a result, their prices fall. Anyone aiming to sell their securities around this period will get a lower return than expected.

3. Inflation risk: Many fixed-income investment options are long-term securities with a fixed return. Consequently, persistent inflation could erode their actual recovery. On the other hand, market-linked securities automatically adjust as per the inflation rate in the economy.

4. Reinvestment Risk-  This risk entails the possibility that you won’t be able to reinvest cash flows from a particular investment at a rate similar to the current return. Such a situation leads to an opportunity cost for the investor. Reinvestment risk is generally higher with securities with high coupon rates and long reinvestment periods. 

Also Read: How do changes in repo rate impact your FD interest rates?

Parting Thoughts

It cannot be denied that we live in uncertain financial times. As we have seen, fixed-income securities offer a more guaranteed rate of return than many other popular investment choices. Hence, they are a prudent choice to add to your portfolio for assured all-weather durability.

The pandemic has proved how one region of the world can bring down economies in another region in a very short time. Thus, risk balancing of portfolios is needed today more than ever, and fixed income securities offer an excellent way of achieving the same.

Frequently Asked Questions

What is the yield on fixed income securities? How is it different from yield to maturity?

The yield from fixed income securities is its annual income divided by the current price of such securities. Yield to maturity is the total expected return on securities if held to maturity upon reinvesting the periodic payments at a constant rate.

What happens to fixed-income securities when the stock market crashes?

Fixed income securities are considered a safer investment option. Their market price increases when the stock market falls. Very highly rated bonds and government securities remain a haven during prolonged stock market crashes. However, sub-investment grade bonds could increase the chances of default if the economy becomes recessionary.

What is the impact of inflation on fixed income securities?

If inflation rises during the tenure of a fixed-income security, it can negatively impact the returns that the security offers. For example, you have bought a bond that has a tenure of 5 years and a coupon rate of 5%. If the inflation in any year increases and becomes 8%, the effective return on the investment is -3%.

Can individual retail investors invest in Treasury Bills?

Retail investors can invest in T-bills by opening an account with the RBI Direct Scheme and investing a minimum of Rs. 10,000/-.

Are fixed income securities liquid?

Yes. Most fixed-income securities are highly liquid. Government bonds, treasury bills, debt funds, etc., are instruments with high liquidity. Instruments like FD, RD, etc., are available for use in an emergency. However, premature withdrawal reduces their returns on them.

What are floating rate securities, and how do they differ from fixed-rate securities?

Floating-rate securities have a variable coupon rate that depends on the benchmark rate like repo rate, MCLR rate, etc and thus changes basis any change in the benchmark rate. In the case of fixed-rate securities, the coupon rate is fixed at the time of issue and does not change during the tenure basis change in any external rates.

How to value a fixed income bond?

The fixed income bonds can be valued using various tools like discounted rate in the market, a series of forward rates, or a series of spot prices.

Who issues the fixed income securities?

Fixed-income securities are usually issued by the government or financial institutions to meet their debt-obligations.

Which fixed-income products are fully taxable?

According to Section 193 of the income-tax act, all the interest income received from fixed-income securities are taxable. For mutual funds, capital gains tax is applicable.

Was this helpful?

Anshul Gupta

Co-Founder
IIT Roorkee Alumnus and CFA with experience of structuring debt products worth more than 15000Cr for institutional and retail investors.

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