Fixed Income Bonds
What are Fixed Income Bonds?
Fixed income bonds offer investors the opportunity to earn fixed income at regular intervals. Bonds are a contract between an investor and an organization, such as a company or the government. The contract states specifics such as the total amount borrowed, the life of the bond, and the coupon rate. The contract legally binds the borrower to make regular payments to investors in return for the capital, called coupon or interest payments.
Note that the interest is always calculated on the bond’s face value, regardless of the bond’s market price. If you purchase a bond with a face value of ₹100 and a 5% coupon rate, and the bond’s market price drops to ₹95, you’ll still receive ₹5 as interest payment.
Benefits of Fixed Income Bonds
Fixed income securities in India, such as bonds, offer a range of benefits that help investors hedge their risk and diversify their portfolios. Following are some key advantages that fixed rate bonds offer.
✓ Low risk: Fixed income securities are one of the safest investment instruments. They typically aren’t as volatile as other high risk asset classes like equities. This makes them a good fit for investors with a low-risk profile.
✓ Provide regular income: Fixed income funds allow investors to earn regular income. The coupon payments, or interest payments on the bonds, are paid periodically. As investors inch closer to retirement and rebalance their allocation from high to low risk assets, debt can offer value through stable, periodic returns.
✓ Risk-free returns: When you invest in government bonds, the risk of default is negligible. Given that G-secs and other fixed income instruments issued by governments are risk free, the risk-return tradeoff can be appealing to many investors.
✓ Can diversify your portfolio: Diversification is key to building an investment portfolio. For instance, it’s easy to see how an all-equity portfolio can put investors at great risk. Instead of building a concentrated portfolio, adding debt to the asset mix can bring down the portfolio’s standard deviation by a good margin.
How do Fixed Income Bonds work?
Fixed income bonds involve two parties: the lender, i.e., you, and the organization, which receives the money. When the organization, such as the government or a company, needs money, they may offer bonds at a variable or fixed interest rate for a particular duration. The interest rate is called the coupon rate, and the bond’s duration is its term.
When you purchase a bond, you’re effectively lending money to an organization. Once you’ve invested, you will continue to receive interest payments at regular intervals depending on the loaned amount and the rate of interest on the bond. Bond interest payments are made annually or semi-annually and continue until the bond matures. After maturity, the initial borrowed amount is redeemed to the investor as a balloon payment.
The probability of receiving your principal amount is greater for bonds issued by creditworthy organizations. For instance, the Government of India is far less likely to default on the bond’s interest or principal payments than a small company.
Why are Fixed Income Bonds perfect for you?
Fixed interest bonds are suitable for every type of investor. Fixed interest securities are less risky, provide guaranteed returns, and help diversify your portfolio. Bonds act as a hedge against market volatility, preventing capital erosion. Thanks to new-age platforms like Plutus by CredAvenue, investing in bonds has also become easy.
You can use Plutus to buy market-linked debentures, covered or perpetual bonds, and commercial papers. The platform has already facilitated transactions worth over ₹4,000 crores, accounting for nearly 50% of covered bonds in India.
Both investors and institutions can use Plutus to achieve their fixed goals. Investors will have access to a large database of information, independent data validation, and a suite of investor-focused features. Institutions, on the other hand, can capitalize on the large pool of investors on Plutus to raise capital quickly.
FAQs
What is a bond?
A bond is an investment instrument wherein an investor or an institution loans money to an organization, such as the government or a company. The latter borrows the funds at a variable or fixed interest rate for a defined time frame. Investors receive regular interest payments until the bond matures.
What are corporate bonds?
Corporate bonds are a contract between investors and the company issuing the bond. Investors who buy corporate bonds lend money to the companies. The latter makes a legal commitment to pay interest on the principal and return the principal when the bond is due or matures.
Should you hold a bond until it matures?
It depends on you and the broader bond market. If the interest rates drop, you may want to consider realizing your capital gains by selling the bonds. However, this isn’t always a good decision, and it’s best to speak with your financial advisor.