Understanding Fixed Income Investments
March 11th, 2009
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Fixed Income Investments are defined as securities that have a regular fixed return associated with them as well as having a guaranteed principal – Fixed Deposits in Banks is one such example. You may have also heard or tried RBI bonds, post office schemes, fixed income mutual funds and other such savings instruments.
They are more or less necessary in every portfolio. Though fixed income investments are subject to various risks, including changes in interest rates, credit quailty, market valuations, liquidity, prepayments, corporate events, tax ramifications, and other factors.
Fixed income investments are perceived to earn tiny amounts of money compared to equity investments. Though these investments are an important part of most institutional portfolios as they offer diversification from a pure equity portfolio to help control overall volatility in the Stock Market
Fixed income investments pay interest at specified times in fixed amounts and are usually issued by a Bank, corporation, municipality or government. Some Fixed income investments are selected (whether high quality taxable or tax-exempt) based on yield differentials and the marginal income tax bracket of each client.
Yes, the Fixed income investments are also subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, corporate events, tax ramifications, and other factors. They provide safety of principal, regular interest income, and the potential to generate capital gains whenever interest rates move lower.
Term Deposits and Guaranteed Investment Certificates (GICs) are another form of fixed term investment. Depending on the issuer, they can providea guaranteed fixed return when held to maturity and are a source ofstable cash flow. This investment asset class is often considered less risky than buying stocks which isn’t always true since some fixed income investments are very risky.
A fixed income security is only as good as the organization that issues it. Tax Advantage The interest income generated by some fixed income investments are tax deferred or tax exempt from Income tax Department. Predictability Most fixed-income investments also provide a predictable stream of income.
What the Experts Say:
Dhirendra Kumar (CEO of Value Research, a mutual fund research organisation) in an article on Rediff.com had written “I’m not saying you must sell every stock and put all your money in fixed income options, but having a certain percentage of your investment allocated for fixed income options and, more importantly, maintaining that percentage is something every investor must do. Maintaining this percentage automatically means that when the stock component rises more than the fixed income part does, one should sell some stocks and invest that money in a fixed income scheme”
Finally it all depends on you – If you love taking risks then start investing in Stocks (Your chances of Making or Loosing money is very high But Do’t want to take risks and are looking for Safer investing options, then you can go in for Fixed Deposits by Banks or go in for Government Bonds
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Fixed Income Investments are defined as securities that have a regular fixed return associated with them as well as having a guaranteed principal – Fixed Deposits in Banks is one such example. You may have also heard or tried RBI bonds, post office sch…
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