Retail investors in India can be said to be reasonably well informed when it comes to investments in equities, real estate or even assets like gold or silver. The Fixed Income asset class, however, is not so well known. As a tool for diversification, and as a safe avenue for volatile times, understanding this class is important. Even experts agree that greater retail participation in the fixed income market in India will make it more robust. Fundsupermart.com has always tried to draw notice to this asset class through various research and personal finance articles on the website. Taking this initiative further, we bring to you this series explaining basics of fixed income investments!

A. INTRODUCTION TO THE FIXED INCOME ASSET CLASS

Fixed Income, as the name suggests, is an investment avenue wherein the investor gets predictable returns at set intervals of time. This investment class is relatively safe with low volatility and forms an ideal investment option for people looking at fixed returns with low default risk, e.g., retired individuals.

ASSET CLASSES IN THE MARKET

There are four broad asset classes in the market:

• Equities: Investments in stocks or shares comprise the equity asset class. Investments in this class accrue higher yields with greater risks involved.

• Real Estate: Investments in land or property fall into the real estate asset class and are long term inflexible investments.

• Commodity: Investments into physical assets such as precious metals.

FIXED INCOME

Fixed income securities denote debt of the issuer, i.e., they are an acknowledgment or promissory note of money received by the issuer from the investor. Characteristics:

• Fixed maturity period ranging from as low as 91 days to 30 years.

• Specified ‘coupon’ or interest rate.

• Generally issued at a discount to face value and the investor profits from the difference in the issue and redeemed price.

ADVANTAGES OF FIXED INCOME SECURITIES

1. Lower volatility than other asset classes providing stable returns.

2. Higher returns than traditional bank fixed deposits.

3. Predictable and stable returns offer hedge against the volatility and risk of equity investments, and thus allow an investor to create a diversified portfolio.

DISADVANTAGES OF FIXED INCOME SECURITIES

1. Low liquidity: investors’ money is locked for full maturity period unless the security is traded in the secondary market.

2. Not actively traded: this lack of competition prevents their prices rising very high.

3. Sensitivity to market interest rate: change in market interest rate changes the yield on held securities.

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We would continue with the series. Watch this space for more...