Classifying Fixed-Income Securities By Issuer Type

Diversification is an important factor in any investment portfolio. Excess reliance on an asset class such as equity can create concentration risk. To avoid this, many investors add fixed-income securities to their portfolios to create a balanced asset allocation. Fixed-income securities are not correlated with the equity market and thus bring stability to your portfolio. 

In this article, we will cover fixed-income securities and how they are classified based on issuer type.

What Are Fixed Income Securities?

Fixed-income securities are investment instruments that offer fixed interest income on your investment. Some examples of fixed-income securities are FD’s (fixed deposits) offered by banks or bonds issued by government and corporate entities. 

You invest in these FDs or bonds in return for a periodic (monthly/bi-annually/annually) fixed interest income for a pre-decided tenure, say 1-3 years. On maturity, you also receive the initial capital or principal back.

Classification Of Fixed Income Securities Based On The Type Of Issuer

While FDs are well known, there are many other fixed-income securities which offer 50-100% more returns than FDs. These come with different risks depending on the type of issuer. Based on the issuer type, we can classify them as below:

1. Government Bonds

Government bonds, also called G-sec, are issued by the central or state government when there is a need to raise funds to undertake development projects. 

Different types of G-sec bonds include fixed-rate bonds, treasury bills, floating-rate bonds, sovereign gold bonds, cash management bills, and savings bonds. 

When you invest in these bonds, your investment is protected by a sovereign guarantee. This makes G-sec bonds risk-free as the chances of a government defaulting are extremely low. Accordingly, these bonds also offer the lowest return amongst different issuer types. 

2. Municipal Bonds 

Local government bodies like municipalities offer these bonds. As a result, they are also called ‘muni bonds’. These funds help local government bodies to undertake infrastructural and other development projects. 

Municipal bonds have a fixed interest rate and tenure. You can invest in them for a couple of years or longer for 10 years. You receive annual or semi-annual interest income on your investment. These are backed by the issuer's (municipal corporations) creditworthiness and could vary in risk depending on the financial strength of the respective municipal corporation.

3. Corporate Bonds

Corporate bonds are issued by private companies to raise funds to undertake various projects, i.e. expanding the business. Compared to G-sec and municipal bonds, corporate bonds are considered to have higher risk, but they compensate you for the risk in return for higher returns. 

Not all corporate bonds are the same and the difference in credit quality is best understood from the rating assigned to bonds by credit-rating agencies like CRISIL. These credit ratings start from D (default) and go to AAA (the safest with the lowest risk and returns). Grip Invest offers a wide range of A and above-rated corporate bonds, in which you can invest according to your preferences and risk tolerance level.

4. Securitised Debt Instruments (SDIs)

Another form of fixed-income securities issued by corporates is SDIs or Securitised Debt Instruments. In these investments, corporates earmark a specific pool of assets as security for investors. All the earnings from these specific assets are then passed on to the investor.  

These assets could be a pool of home loans issued by an NBFC, a pool of leased assets or even a pool of invoices. Like corporate bonds, SDIs are also provided with a credit rating depending on the quality of the pool of specific assets. Due to the nature of these securities, they tend to offer higher returns than corporate bonds for the same level of risk. 

The market for such investment instruments crossed INR 2 lakh crore in FY24, making it one of the largest types of fixed-income security. 

Grip Invest offers a wide range of SDIs including LoanX, InvoiceX and LeaseX, that allow you to participate in such opportunities and earn attractive returns.

Conclusion

Fixed-income securities help you include predictable returns in your investment portfolio and offer diversification. Depending on the Issuer, fixed-income securities can be classified into various categories, which you can invest in according to your individual financial goals and risk appetite. Through SEBI-regulated OBPP platforms, these options can now be accessed conveniently and at low minimum investment amounts. 

To know more about investing in fixed-income securities, explore Grip Invest. 

Frequently Asked Questions On Fixed-Income Securities

1. Who is the issuer of fixed-income securities?

The issuer of fixed-income securities can vary depending on the instrument. For example, G-sec bonds are issued by state and central governments, while corporate bonds are issued by private corporations. 

2. Who qualifies as an issuer of securities?

Any legal central or state government regulatory body, public entities, banks, and financial institutions, and corporate bodies in India can qualify as issuers of fixed-income securities. Based on regulatory restrictions, the kind of fixed-income instruments each of these bodies can issue may differ. For example, only the central government can issue certain zero-coupon bonds, G-sec bonds, and treasury bills.

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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.
This communication is prepared by Grip Broking Private Limited (bearing SEBI Registration No. INZ000312836 and NSE ID 90319) and/or its affiliate/ group company(ies) (together referred to as “Grip”) and the contents of this disclaimer are applicable to this document and any and all written or oral communication(s) made by Grip or its directors, employees, associates, representatives and agents. This communication does not constitute advice relating to investing or otherwise dealing in securities and is not an offer or solicitation for the purchase or sale of any securities. Grip does not guarantee or assure any return on investments and accepts no liability for consequences of any actions taken based on the information provided. For more details, please visit www.gripinvest.in

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