Types of debt investments

Posted by Mehul Kothari | Published on 14 Mar 2019
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Types of debt investments

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:

✓ Bonds

Bonds 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.


✓ Debentures

Unlike 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 funds

Debt 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 Bills

Commercial 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 word
Debt 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.

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Why debt investments matter?

Posted by Mehul Kothari | Published on 14 Mar 2019

While planning an investment portfolio, people often confuse investments with equity. Yes, equity is an important part of an investment corpus, but so are debt market instruments. Just like a well-balanced diet is important for a healthy lifestyle, an investment portfolio needs to have a proper mix of both equity and debt market instruments. With the fall in interest rate over the last couple of years, fixed income or debt investments have become significantly less attractive. However, a smart strategy to creating a healthy investment portfolio is to have adequate proportions of both equity and debt investments depending on your risk profile. Regardless of the economic environment, there are some inherent benefits of debt investments that makes them an integral part of an investment basket. Key benefits of fixed income investments✓ Assured Income: Even as you invest for wealth creation over the long run, it is also important to create a regular source of income. Most bonds pay interest (at fixed rate) on a regular basis which is either yearly or half yearly. You can however opt to reinvest the same if you do not need a steady flow of income. The Indian bond market offers a variety of products to suit various needs. ✓ Stability: Every investment carries some degree of inherent risk. Fixed income investments are less risky when compared to equity investments as they provide capital protection. Since fixed income investments are a debt investment, they work on the basic principle of repaying the amount of money that was originally invested at the time of maturity. This means there is little fear of losing the original capital. Thus, fixed income investments provide a sense of stability to the overall portfolio. ✓ Liquidity: There are various types of debt investments that provide high liquidity. You can choose debt instruments based on your liquidity requirement. For example, liquid funds and short-term debt funds can be considered as short-term investment products. ✓ Indexation benefit: Unlike equity investments, some debt investments provide indexation benefit to its investors if the period of holding is three years or more. This provides significant tax relief from the capital gains. ✓ Diversification: Usually, prices of equity and debt investments move in different direction. Due to the inverse relationship, fixed income investments can be a valuable addition to your portfolio and provide a hedge against equity. Government bonds, private bonds, fixed maturity plans and bank deposits etc. are some of the popular fixed-income investment choices available to diversify your portfolio. It is also important to consider the credit quality, interest rate volatility and economic cycles in a debt market. Here we look into why debt investments matter.Introduction to debt market The Indian debt market is one of the largest in Asia. In a developing country like India, debt market is an important source for raising finance. ✓ The Indian government raises money for all their developmental activities through the debt market. In order to finance various developmental activities, the government (both central and state) issue bonds to borrow money. Government securities are issued by the Reserve Bank of India on behalf of the government. ✓ Debt market can also help control inflation. A reduction in the interest rate for government securities increases liquidity in the market as investors reduce buying bonds. The opposite holds true as well. ✓ An efficient debt market helps in effective mobilization and allocation of resources in the economy. Investment in debt market mobilizes the idle household resources which would otherwise not be a part of the money in circulation. With a rise in interest rates, the idle money can be put to use, thereby increasing the government’s corpus. Thus, effective mobilization and resource allocation leads to economic efficiency and growth. To sum up, there are various benefits of debt investments. For one, debt market offers various investment opportunities. Debt investments play a vital role in building a well-balanced portfolio. Irrespective of economic conditions and market trends, it is important to have an ideal mix of stocks and debt investments based on your investment objective and risk profile.     Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.

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Myths about fixed income investments

Posted by Mehul Kothari | Published on 14 Mar 2019

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-freeReality: 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 generationReality: 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 bondsReality: 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 retirementReality: 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.

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