Other Fixed Income Securities in India
Apart from the basic categories of bonds, many other fixed-income securities attract investors with a particular investment requirement. Here are some options:
Other Fixed Income Securities
1. Sovereign Gold Bonds (SGB): The Government of India introduced the Sovereign Gold Bonds (SGBs) scheme in 2015 to offer an alternative to physical gold. These are government securities denominated in grams of gold. After the launch of SGBs, the market witnessed a massive decline in the demand for physical gold because SGBs are an excellent substitute for physical gold. These are government securities and are considered safe. The Reserve Bank of India issues SGBs on behalf of the Government of India to reduce the import of gold into the country. Sovereign Gold Bonds (SGBs) are paid out in domestic currency, but the value of these bonds is calculated using the price of gold at the time of issue and redemption. These can be stored digitally in demat accounts, eliminate the risk of holding physical gold, and are free from making charges and issues related to purity. The minimum investment in SGBs is one gram, and the maximum limit is 4 kgs for individuals, 4 kgs for Hindu Undivided Family (HUF) and 20 kgs for trusts and similar entities. They provide an interest of 2.5%, fixed and paid out every six months.
2. Perpetual Bonds: It is a fixed income security with no maturity date. These bonds cannot be redeemed, but they pay regular interest to the investor, but the investors do not get the principal payment with a predetermined redemption date. The interest payments on these bonds are payable forever. The issuer of perpetual bonds has the option of calling back the bonds. The buyer can sell the bonds once the issuer calls them back. Typically, the call option dates are 5-10 years after the bond issuance date. However, in India, perpetual bonds are listed on the stock exchange. If the investor wants to convert the instrument into cash, they can sell the bonds on the stock exchange.
3. AT1 Bonds: Additional Tier 1 (AT1) bonds are a type of perpetual bonds. The banks use these bonds to increase their core equity base. The major holders of these bonds are mutual funds. Like perpetual bonds, AT1 bonds never mature, meaning the bond issuer never pays back the principal to the investors. However, banks pay regular interest. But, if the bank’s capital ratio falls below a specific percentage or is facing losses, the interest payment can be delayed or skipped. Due to their perpetual nature, they pay higher returns than ordinary bonds.
4. Tier-2 Bonds: The banks issued these bonds to fulfil their Tier 2 capital requirements. They have a minimum maturity period of 5 years. These bonds are unsecured and subordinated in claims to depositors, unsecured creditors and senior bonds.
5. Savings Bonds: The investment limit for savings bonds are set low so that more people can invest easily. The minimum investment required for this bond is Rs. 1,000, which makes it easily affordable for more investors. The investment amount can be increased in multiples of Rs. 1,000.
6. High-Yield Bonds: As the name suggests, high-yield bonds pay very high interest because they have fewer credit ratings than investment-grade bonds. These bonds are riskier and produce a higher interest rate than investment-grade bonds to compensate investors.
7. Green Bonds: It is a debt instrument introduced to support specific climate or environmental-related projects. Financial or non-financial public entities can issue green Bonds to use the money for 100% green projects. In India, the first green bond was issued by YES Bank in 2015 to finance renewable and clean energy projects, particularly solar and wind.
8. REITs and InvITs: Real Estate Investment Trust (REIT) is a financial instrument that owns and manages real estate that generates regular revenue. These are akin to mutual funds, and the primary goal of REITs is to generate steady income and capital appreciation. It invests in various real estate, including industrial parks, offices, warehouses, hospitality centres, malls, hospitals etc. In India, there are three famous REITs – Embassy Office Parks REIT, Mindspace Business Parks REIT and Brookfield India Real Estate Trust.
Infrastructure Investment Trust (InvITs) is a trust that pools money from various investors and invests in revenue-generating assets. The main objective of InvITs is to have a healthy cash flow over a period of time. They work similarly to REITs; the difference lies in the investment. While REITs invest in real estate projects, InvITs invest in infrastructure projects, including roadways, transmissions, power plants etc.
9. Tax-Free Bonds: These bonds are issued by approved government enterprises and public sector undertakings for raising funds with no tax liability on the interest income or the capital gains. A municipal bond is the perfect example of such an instrument. Many public sector undertakings in India have issued such bonds. These bonds are considered safe because the possibility of default is very low. But these bonds have very low liquidity in the market. Some of the tax-free bonds in India are issued by Power Finance Corporation, NTPC Limited, Indian Railways Finance Corporation Limited, Rural Electrification Corporation, National Highway Authority of India, etc.
10. Asset-backed Securities: An asset-linked security (ABS) is an investment security backed by various assets, including loans, leases, credit card debt, royalties or receivables. Asset-backed guards allow the bond issuer to monetise the receivables, generate an income that can be used for lending, and enable investors to participate in many income-generating assets.
11. Equity Linked Note: These are structured products and are a good option for conservative investors. An Equity Linked note provides the opportunity to get better returns than fixed-income investments because its return is linked to the performance of an underlying equity or a broader market index.
12. Participatory Bonds: These are financial instruments that the investors and hedge funds use to invest in Indian securities. The issuer of these bonds provides a fixed interest, and also, in some cases, the interest rate may fluctuate depending on the company’s profit. Participatory Bonds are a good option if someone is interested in earning from the company’s revenues.
13. Income Bonds: These bonds are akin to participatory bonds, but these bonds do not have a reduction in the interest payments when the company’s income reduces.
14. Payment in Kind Bonds: This kind of bond pays interest in the form of additional bonds and not in terms of cash.
15. Extendable Bonds: These bonds allow the holder to enjoy the right to extend the maturity period of the bond.
16. Extendable Reset Bonds: These types of bonds allow the issuer and the bondholders to extend the maturity period with a reset in the coupon rate based on the market conditions. Typically these bonds have a more extended maturity period.
Frequently Asked Questions (FAQs)
What are the potential benefits of investing in fixed-income securities?
Fixed-income securities provide diversification from stock market risk, preserve an investor’s capital and are a decent source of generating income.
What are some of the risks associated with fixed-income security?
Four significant risks are associated with fixed-income securities: interest rate hikes, rise in inflation, credit risk and liquidity risk.
Is it an excellent option to invest in fixed-income securities?
Investing in fixed-income security can be an excellent way to diversify your portfolio and mitigate stock market risk, as it provides pre-determined returns.