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.