Fixed income investments are a popular investment choice for many risk-averse investors. Fixed income investments provide stability by offering an assured income along with capital protection. However, there are certain myths that surround these investment options. It is pertinent you pick the right bones before you invest. Separating the wheat from the chaff is of key essence here. So, let’s look at some of the fixed income investments myths that bog fixed income instruments down. In the myth busting pointers below we help clear the air for you.
Myth 1. Fixed income investments are risk-free
Reality: Fixed income instruments are considered as risk-free. However, they do carry a certain degree of risk. For example, bonds and debt funds are subjected to credit risk and interest rate risk. Corporate deposits are subject to liquidity risk.
Hence, it’s important to consider various things like consistency in returns, debt-equity ratio and credit ratings of the issuer when assessing fixed income investments.
Also, if you are investing in debt funds, take a look at underlying instruments of that fund. If the fund manager invests in debt instruments that have poor ratings, getting out of the fund during an emergency could get difficult.
Myth 2. Fixed income investments are solely for income generation
Reality: Along with income generation, fixed income investments also offer an opportunity for growth. For example, convertible bonds have an equity component for growth. There are other products like debt mutual funds and convertible bonds as part of fixed income investments in India that provide growth opportunity as well.
Myth 3. Increasing interest rates are bad for bonds
Reality: Generally, bond prices go down with a rise in interest rates. And this is what makes people assume that rising interest rates are bad for bonds. But, the rising interest rate scenario could work in favour of some bond investors. The impact of rising rates depends on the investor’s time horizon or how long an investor wants to hold the particular bond investment.
For example, you invest in a bond fund for the long-term. Over the period of time, value of the bond fund can recover even in if the interest rate rises. That’s because your fund manager rebalances the portfolio on a regular basis.
Myth 4. Fixed income investments are for retirees or those nearing retirement
Reality: Debt-oriented options should be a part of your portfolio. That’s because it helps diversify the investments you have. For example, if your equity investment doesn’t do well, you can rely on your debt investment to help you out. Debt investment is needed to stabilize and balance the overall investment portfolio.
Thus, it is the combination of equity and debt investments that is vital for building a healthy investment portfolio for fulfilling long-term financial goals. In addition, tax free fixed income investments such as ELSS can also ensure you build wealth while at the same time you also receive tax exemptions.
Fixed income instruments can be an excellent way of receiving almost-assured steady income, and securing your capital. However, like every financial investment, a lot of data out there could be bad and inaccurate as much as there is genuine information.
Based on the kind of fixed income assets you are evaluating, you could be working on misconceptions and that could cost your hard earned money. As the above mentioned points show, every fixed income investments is unique. Each one has its set of risks and opportunities that you need to consider. Look into your goals and time frame to invest in the exact type of fixed income investment for your future.
Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
The Indian debt market offers a large range of products that can help you meet different financial goals. Each debt investment product varies in terms of return potential, risks involved, tax implication as well as time horizon. So, once you know about the various types of debt instruments, it would be easier to choose the product that best suits your needs. Some popular debt instruments in India are:✓ BondsBonds are issued by government undertakings, financial institutions or large corporates. Bonds offer a fixed rate of interest for the entire lifetime of the product. There are various types of bonds. For example, investors who look for an assured income over the long-term can think of investing in government bonds. Investor who does not need regular income but want a guaranteed yield can consider to invest in ‘zero coupon bonds’. Tips to invest: Bond investment strategy can vary depending on your investing style. o If you invest for capital appreciation plus income, then you may want to invest in bonds when prices are low and later sell them at a higher price before maturity. o In case you want to maximize your income with capital protection, you may consider investing in high-yield bonds with ‘buy and hold’ strategy. ✓ DebenturesUnlike bonds, debentures are the debt instruments that are not secured by collaterals or backed by government undertakings. It totally depends on the reputation and the creditworthiness of the issuer. Companies offer debentures to raise capital for medium to long terms and it reflects in the company’s balance sheet. Tips to invest: Investors can choose the interest payout or the cumulative option, depending on their requirement. If you are looking for regular income, you can opt for quarterly or monthly pay out of interest. If you opt for cumulative option, reinvested interest will be paid on maturity. Debentures generally offer higher rate of interest as compared to bank fixed deposits. However, the only point of contention for debentures is the credit worthiness of the issuer. Therefore, it is important to consider the credit rating of the issuer before investing in the debenture. ✓ Debt mutual fundsDebt mutual funds invest a large part of their corpus in fixed income securities. From a taxation point of view, any mutual fund which holds less than 65% of the total holdings in equity are considered debt mutual funds.Some popular examples of debt mutual funds are FMPs or fixed maturity plans, MIPs or monthly income plans, short-term and long-term debt plans as well as liquid or cash funds. Tips to invest: Selection of fund type needs to be based on the investment objective. If your plan is to generate regular income along with guaranteed yield, then you can consider FMPs. If you have surplus cash lying idle, which you may want to use later, say within a few months, you can park your money in liquid funds for the time being. ✓ Certificate of Deposits Certificate of Deposits (CoDs) are term deposits issued by banks, credit unions and select financial institutions in India. CoDs are issued in dematerialized form. Maturity period of certificate of deposits can vary from seven days to one year if issued by banks. If issued by financial institution, the maturity period ranges between one and three years. Tips to invest: Certificate of Deposits offer competitive rate of interest when compared to government securities. CoDs can be considered as a good short-term investment option. However, investments in certificate of deposits are primarily made by institutional investors only. ✓ Commercial Papers and Treasury BillsCommercial papers, or CPs, are issued by corporates in the form of promissory notes. Individuals, banks, corporates and foreign institutional investors can invest in commercial papers. Treasury Bills, meanwhile, are short-term debt instruments offered by the Reserve Bank of India to investors for parking their short-term funds. The last wordDebt investments provide the cushion to your overall investment portfolio. They also help in diversification, capital protection and income generation. Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
Mutual funds are versatile and can fit into any investing style. That’s because there are different types of mutual funds in the market. Each mutual fund serves a different purpose. These funds vary in their investment objective, risks, returns as well as taxation. The wide range of mutual funds, therefore, helps you invest in the right fund. Therefore, it is important you understand the different types of mutual funds. It can help you make the right decision. So, let’s enlist the different types of funds for a better understanding of the mutual fund market.Mutual fund categoriesOn a broader level, mutual funds are categorized as equity and debt funds. A mix of the two is known as a hybrid fund. ▪ Equity funds Equity funds mainly invest in stocks of companies. There are various types of equity funds available in the market. They are: ✓ Diversified equity funds: Diversified equity mutual funds are pure equity funds which spreads your invested money across various sectors and companies regardless of their market capitalization. These are multicap funds and are suitable for a moderate risk-taker. Staying invested for five to six years may deliver potential returns. However, study the fund’s past returns and its objective before investing. ✓ Sector funds: Such funds invest in one particular sector. For example, Banking and Financial Service Fund invests in banking and financial services sector only. Sector funds can be a good choice for long-term investing. However, this entails higher risk. So, before you invest, it is important to study the sector and analyse how it may outperform the market in future. ✓ Equity-linked savings schemes(ELSS): These are the tax-saving mutual funds that qualify for deduction under Section 80C of the Income Tax Act. Although ELSS funds come with a lock-in period of three years, using the SIP route can make such investment affordable. ✓ Hybrid funds: These are balanced funds that invest in both stocks and bonds. They are considered equity-oriented funds as they invest at least 65% of total money in equity. These are good investment options for beginners. ▪ Debt funds Debt funds are mutual funds that principally invest in debt instruments like bonds, treasury bills and other fixed income investments. These funds can be further categorized: ✓ Income funds: These funds majorly invest in fixed-income instruments like bonds, government securities and corporate debentures etc. The major focus is on income generation. It’s important to consider the interest rate. That’s because interest rate volatility has an impact on these funds. Investing during a falling interest rate scenario and exiting when rates tend to rise can benefit you in such funds. If you have one to three years’ time frame in mind, these funds can be a good option. ✓ GILT funds: These funds majorly invest in government securities. Generally, these funds are safe since there is no default risk. However, gilt funds are subjected to interest rate risk. For example, if the interest rate moves up, the yield of a GILT fund goes down as it becomes less attractive and vice versa. Thus, you need to keep a track on the interest rate movements. ✓ Short-term funds: These funds primarily invest in money market instruments like treasury bills and certificate of deposits. The average maturity of such papers are low and the investment is thus suitable for a short-term horizon like three to six months. ✓ Monthly income plans (MIPs): These are debt-oriented hybrid funds with a small allocation in equity and a majority of the investment in debt. MIPs usually pay a monthly dividend. Investors with low to moderate risk profile can consider this as an option in order to receive a regular income. But do remember that the monthly dividend is not a guarantee. ✓ Liquid funds: These invest in short-term debt instruments like commercial papers, treasury bills and corporate deposits. These are a good short-term option. Now that you know how different mutual funds work, you can choose to invest based on your needs. Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
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