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How to get the best from your fixed-income investments

Debt instruments are crucial in financial markets. They offer stable and reliable income, facilitate capital-raising, contribute to economic growth and diversify investment portfolios

November 16, 2023 / 02:39 PM IST
Debt instruments provide stable and consistent income and ensure a secure investment

Debt instruments provide stable and consistent income and ensure a secure investment

The one asset that has been in the news in 2023 is fixed income. Thanks to the high interest rates, debt instruments — be they debt mutual fund schemes or even assured return instruments like small-saving instruments — offer good options, if you wish to plan your portfolio at least for the next five years or so. There are more compelling reasons.

In the intricate domain of finance, debt instruments stand as an indispensable cornerstone within diversified investment portfolios. These financial instruments proffer a multi-faceted array of options catering to the preferences of individual and institutional investors.

Debt instruments provide stable and consistent income and ensure a secure investment. On the other hand, equity instruments offer higher returns with more risk due to the ownership of a company. Debt instruments are crucial in financial markets. They offer stability and reliable income, facilitate capital-raising, contribute to economic growth and diversify investment portfolios.

Understanding diverse debt instruments

One of the most time-tested debt instruments is fixed deposits (FDs) offered by banks and financial institutions. They require investors to lock in their funds for a predetermined period. They offer a fixed, often higher interest rate than savings accounts. FDs are a safe choice for risk-averse investors but can have potential opportunity costs due to fixed lock-in periods that may not keep up with inflation or changing interest rates.

You can now invest in Fixed Deposits on Moneycontrol 

Another most tradable debt instrument is government bonds. They are issued by the central government (CG) or state governments (SGs) under the supervision of the Reserve Bank of India (RBI). CG issues both treasury bills (short-term instruments with a maturity of less than one year) and bonds or dated securities known as G-Secs (usually have a maturity of more than a year) while SGs issue only bonds known as State Government Securities. G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.

Treasury bills are short-term debt instruments, and are, at present, issued in three tenors — 91 days, 182 days and 364 days. These are zero-coupon securities and pay no interest. Instead, they are issued at a discount and redeemed at the face value on maturity.

Public/private sector corporates also issue debt security known as corporate bonds for a variety of business purposes.

These securities are issued by public sector enterprises, public sector banks, all-India financial institutions, private sector companies, etc., for their business activities.

The tenor of such instruments is generally in the range of 1-15 years. However, it may vary depending on the funding requirements of the issuer. Corporate bonds are not sovereign and are serviced by the entity issuing them. Hence, they carry a risk of default on the part of the issuing entity in fulfilling its interest or principal payment obligations, based on which they carry a rating (usually AAA to D) specified by rating agencies.

Certificates of deposit (CDs) are time deposits available through banks and financial institutions, providing a secure investment option with fixed maturities and interest rates. They are highly liquid, making them ideal for temporarily parking surplus funds.

Additionally, there is commercial paper (CP), a short-term debt instrument issued by corporations to fulfil their working capital requirements, which usually remains unsecured and comes with maturities spanning from seven days to a year.

Also read: FD rates for Senior Citizens: Banks that offer up to 8% interest on 3-year deposits

Why debt investments work

FDs are prized for their dependable and guaranteed income, making them a preferred choice for risk-averse investors.

CPs offer businesses a swift route to secure short-term funds, enhancing liquidity. Bonds, whether issued by governments or corporates are valued for their ability to deliver consistent income streams and diversified investment opportunities, catering to a range of risk preferences.

These instruments collectively form an essential part of India's capital market, offering investors a comprehensive suite of choices aligned with their risk profiles and investment objectives.

There are other instruments, such as government savings schemes like PPF, NSC and SCSS, that offer secure debt instruments with attractive interest rates and tax benefits, ideal for long-term savings.

Making the right choice

The Indian debt market offers a plethora of options to investors, each with its unique risk-reward profile and characteristics. By carefully selecting and diversifying debt investments, investors can achieve their financial objectives while maintaining a robust risk management strategy. Remember, while debt instruments offer stability and income, it is crucial to align your investments with your overall financial plan and objectives. Seek advice from financial experts or advisors to make informed decisions in your pursuit of financial success.

Disclaimer: Views and opinions expressed in this column belong to the author. Moneycontrol advises users to check with certified experts before taking any investment decisions.

Saurabh Jain is Co-founder, Stable Money
first published: Nov 16, 2023 01:49 pm

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