Building Your Portfolio: An Introduction To Fixed-Income Investing

Investors have different reasons that guide their investment decisions. While some may be comfortable in investment avenues with high-risk, high-return potential; others may seek low-risk, moderate returns.  

Balancing one’s portfolio with lower-risk investment instruments is essential for an investor, especially during market volatility. Fixed-income investing is one way to do so. In this blog, we discuss what fixed-income investing means, its types, and its advantages and limitations.

What Is Fixed-Income Investing?

Fixed-income investing involves purchasing securities that yield consistent and predictable cash flows through fixed interest rates. It promotes wealth generation, enables capital preservation, and efficiently mitigates volatility risk.

Let us understand how it works with a practical example. ABC Ltd. has launched bonds with a face value of INR 1,000. The pre-tax return rate paid monthly is 12%, and the bond has an 18-month maturity. The company plans to pay its debt using bonds and generate sufficient profit to repay them.

Suppose an investor invests in ten units or INR 10,000 in such bonds issued by ABC Ltd. They will receive a monthly fixed income of INR 100 for 17 months. At maturity (18th month), ABC Ltd. will repay the principal of INR 10,000 (10 x 1,000) along with the last month’s interest.

What Are The Types Of Fixed-Income Investments?

Some well-known fixed-income securities investors can invest in to earn passive income are as follows:

1. Money Market Instruments

Commercial paper, a certificate of deposits, and treasury bills are short-term liquid obligations within a regulated environment. Commercial banks, non-banking financial institutions, governments, or corporations issue money market instruments with a maturity period of one year or less to lenders (investors). 

Depending upon the instrument and tenure, investors can earn moderate yields at low risk. For example, Treasury bills yield approximately 7% annually.

2. Debt Mutual Funds

Debt mutual funds are the accumulated pool of resources of various investors. A fund manager manages the funds and invests the corpus in several debt instruments, like corporate bonds, T-bills, and other fixed-income investing funds. Debt mutual funds deliver a relatively more attractive return than fixed deposits, ranging between 7% - 8% annually.

3. Corporate Bonds

Corporate bonds are investment instruments issued by corporates and other institutions to raise capital to run operations or for capital investment. In exchange for capital, the investor receives periodic interest payments at a fixed rate. Once the corporate bonds mature, the investor will be paid back their principal. 

Investment-grade corporate bond yields lie between 10.5 to 13.0%.

4. Securitised Debt Instruments or SDIs

SDIs involve issuing asset-backed securities, which allow investors to earn passive income from the underlying assets. Investors can earn pre-tax yields of 11 to 16% with credit-rated SDIs.

For instance, LoanX by Grip Invest allows investors to receive regular returns by investing in a diversified pool of loans through credit-rated, exchange-listed, and SEBI-regulated opportunities.

5. National Savings Certificates

NSC, or National Savings Certificates, are available in post offices with a fixed maturity period of 5 years. They offer a fixed interest rate, guaranteed returns to earn passive income, and tax exemption benefits under Section 80C of the Income Tax Act.

The government decides to revise the interest in the NSC savings scheme quarterly. Currently, the NSC provides an interest rate of 7.7% p.a., higher than bank FD and PPF interest rates.

6. Fixed Deposits (FDs)

Fixed deposits (FDs) offered by banks and non-banking financial corporations (NBFCs) are considered secured fixed-income investment instruments. Currently, FDs offer returns of up to 7.5% p.a. for general citizens, depending upon their tenure.

While FDs offer stability, their returns might not be the best. However, some NBFCs are offering credit-rated, high-yielding FDs with up to 8.8% p.a. interest.

Benefits Of Fixed-Income Investing

Below are the notable benefits investors can expect with fixed-income investments:

1. Steady Return

Fixed-income investments help earn predictable passive income. Investors can estimate how much money they will generate from their investment by considering its principal amount, interest rate, and maturity. 

2. Potential Tax Benefits

Some fixed-income assets and securities offer tax advantages. For instance, NSC offers tax exemptions for investments up to INR 1,50,000 under the Income Tax Act.

3. Lower Volatility

Due to their non-market-linked nature, they are less volatile, offering security during short-term market downturns.

4. Portfolio Diversification

The returns from some fixed-income investments (e.g., bonds and SDIs) and equity instruments are inversely related in a low-inflation environment. Adding the former to your portfolio can balance the risk profile and ensure it is more weather-resistant.

Potential Risks Of Fixed-Income Investing

Fixed-income investing is relatively safer than high-yielding equities but earns lower returns. Some other risks associated with the former are:

1. Risk Of Interest Risk

Bond prices and interest rates show an inverse relationship. When interest rates rise, bond prices fall. Investors holding bonds at low-interest rates may see a decline in the value of their bonds.

2. Inflation

Inflation means a rise in prices in the economy. An increase in inflation can reduce the gains from fixed-income assets and securities. If a fixed-income investment pays a 10% return and inflation increases by 1.5%, an investor will earn only an 8.5% return and lose a part of their income in real terms.

3. Early Exit

Due to lock-in/maturity, getting an early exit from fixed-income investments can be challenging. For example, locking up money in a four-year certificate of deposits and withdrawing those funds within two years of investment can result in a penalty.

Conclusion

Investing in fixed-income assets can provide valuable stability to a portfolio. It reduces volatility and ensures investors get a fixed income. Although fixed-income investments have considerable limitations, allocating a certain amount is crucial for diversifying risk.

Furthermore, identifying one’s goals and evaluating available options is ideal for making an informed decision. Grip Invest offers a range of fixed-income investment options. You can explore the platform to access regulated and high-yield opportunities and build a diversified portfolio with minimal requirements.

Frequently Asked Questions On Fixed-Income Investing

1. What are some examples of a fixed investment?

Treasury bills, certificates of deposit, corporate bonds, and securitised debt instruments like LoanX, LeaseX, InvoiceX, etc., are common examples of fixed-income investments. 

2. Is a mutual fund a fixed-income investment?

Mutual funds that generate a stable income are called bond mutual funds and fall into the fixed-income category. They pay a fixed rate of return, such as money market funds and government bonds.

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Disclaimer - Investments in debt securities/municipal debt securities/securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully. The investor is requested to take into consideration all the risk factors before the commencement of trading.
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