Fixed Income Investments: A Guide to Bonds, FDs & Government Securities

Imagine, you are sitting with your friend Raj, and he wants to create an investment portfolio for himself in stable investments. He is averse to risk and has heard of fixed income investments like bonds, fixed deposits, and government securities but is confused as to which would best suit his requirements. You decide to take him through these options, explaining the benefits and helping him to decide which might be right for him. The ideal investor who is conservative, like Raj, would be fixed income investments wherein he will have returns with much lower risks than in equities. Some popular fixed-income options in India that possess their distinctive features and advantages include bonds, FDs, and G-Secs.

Let's see these to give Raj a clear picture.

Bonds are essentially loans to a corporation, bank, or even government. When Raj buys a bond, he is lending to the issuer in exchange for regular payments of interest-called coupons-and, at maturity, the principal he invested. Not all bonds are the same. Corporate bonds are those issued by companies and normally promise a higher return than government bonds since the latter enjoys the backing of the Government of India and as such are super safe. Major advantages of bonds are steady income through regular interest payments, accruing to them therefore seen as reliable means of income generation. However, bonds have some risk factors: a risk of interest rate-the value of existing bonds declines when the interest rate rises-and corporate bonds have a certain degree of credit risk since there is a possibility for the issuer to default on obligations.

Then comes fixed deposits, or more commonly known as FD, instruments in which banks and NBFCs offer deposits. A good example would be when Raj places a fixed amount of money for a specific term of time at a pre-fixed rate of interest. With this, the attractiveness of a deposit is that it ensures complete returns irrespective of the outcome in the market; for this reason, conservative investors find it a haven for investment. Additionally, FDs are insured up to ₹5 lakh under the insurance coverage of DICGC, adding an extra layer of security. They also offer flexible tenure options, from a few months to several years. The downside is that usually, the returns on an FD are much lower than those from market-linked investments. Also, early liquidation attracts penalties, which further reduces their flexibility.

Gov't. Securities, or G-Secs - These are another cornerstone for fixed income investing. Put simply, these are loans issued by the Government of India through this issuance in order to fill fiscal needs. GSec's provide returns on short-term investments of treasury bills and longterm investment of government bonds. Now, the main advantage dealing with G-Secs pertains to their virtually nil/negligible risk - especially they being government-backed. They also pay periodic interest, more so for the long-term G-Secs, which may come in handy and be more or less regular, a factor of income on which a retiree or someone looking for predictability of investment return could rely on. Again, like bonds, all G-Secs carry the chances of interest rate risk if sold before maturity and usually promise returns that are pretty below par compared to the rest of the fixed-income investments.

Relatively speaking, all three-bonds, FDs, and G-Secs-come with their set of relative merits, suitable to investors depending upon their risk tolerance and financial goals. In the case of a conservative investor like Raj, both FDs and G-Secs will be the most suitable options, offering safety with assured returns. If he can digest a little higher risk for better returns, then corporate bonds could form a decent addition to his portfolio.

Ultimately, it depends on what Raj wants: regular income, protected capital, or both. While corporate bonds are suitable for moderately risk-tolerant investors in search of higher returns, for short-term goals with an eye towards absolute safety, FDs and T-Bills remain better options.

Conclusion

Bonds, FDs, and G-Secs represent some of the best fixed-income investment avenues that yield stable and predictable returns, befitting conservative investors. The precise understanding of peculiar features and relative benefits of each would empower Raj to create a well-diversified portfolio for achieving the desired financial goals while maintaining risk appetite. A proper balance between these fixed-income instruments with other investment avenues would fetch maximum growth with efficient risk management, thus securing the financial future.

In the next, we will be discussing the pros, risks, and current trends in real estate in the next chapter to help you determine whether it is still a valuable addition to your investment strategy.