Fixed income securities

💰 Investing in Fixed Income Securities in India

Fixed-income securities are vital to India’s financial system. They provide stable returns for investors while serving as a key source of funding for companies and the government. Here’s a detailed overview of how the market works with practical examples.

🏦 A. Debt Market and Its Role

The debt market is where financial instruments like bonds, debentures, and treasury bills are issued and traded. It offers a lower-cost alternative to equity financing for companies and governments.

Why is the Debt Market Important?

  • For Companies: Helps fund expansion, working capital, or infrastructure without relying on expensive bank loans.
  • For the Government: Bridges fiscal deficits and finances public projects through market borrowing.

Examples

  • Corporate Debt: Reliance Industries raising capital via Non-Convertible Debentures (NCDs).
  • Government Debt: The Government of India issuing Treasury Bills (T-Bills) or long-term Government Securities (G-Secs).

📝 B. Bond Market Participants

The Indian bond market ecosystem includes:

  • Issuers: Government (via RBI), corporates.
  • Investors: Banks, mutual funds, insurance companies, pension funds, and individual investors.
  • Intermediaries: SEBI, NSE, BSE, NSDL, CDSL, rating agencies (e.g., CRISIL, ICRA).
  • Regulators: RBI (government securities); SEBI (corporate bonds).

Trading Platforms Example

  • NDS-OM (NSE): For trading government securities.
  • BSE BOND: For trading corporate bonds.

⚠️ C. Risks of Fixed Income Securities

Fixed-income investments carry risks:

  • Credit Risk: Issuer may default (e.g., IL&FS default of 2018).
  • Interest Rate Risk: Rising rates reduce bond prices (e.g., RBI repo rate hikes).
  • Inflation Risk: Reduces purchasing power of fixed returns.
  • Liquidity Risk: Difficulty selling bonds with low demand.
  • Reinvestment Risk: Lower returns if reinvestment rates drop.

💹 D. Bond Pricing Basics

A bond’s price equals the present value of its future payments:

P=∑C(1+r)t+F(1+r)TP = \sum \frac{C}{(1 + r)^t} + \frac{F}{(1 + r)^T}P=∑(1+r)tC​+(1+r)TF​

Where:

  • P = Bond Price
  • C = Coupon Payment
  • r = Discount Rate
  • F = Face Value
  • T = Time to Maturity

Example

A ₹1,000 bond with an 8% coupon and 10-year maturity will lose value if market interest rates increase.

📊 E. Yield Measures

  • Current Yield (CY) = (Annual Coupon / Current Price) × 100
  • Yield to Maturity (YTM) = Return if bond is held to maturity.
  • Yield to Call (YTC) = Return if bond is redeemed before maturity.

Example

Bond price = ₹950, annual coupon = ₹80
Current Yield = (80 ÷ 950) × 100 = 8.42%

📈 F. Yield Curve Concept

A yield curve shows the relationship between bond yields and maturities.

Types of Yield Curves

  • Normal: Long-term yields > Short-term yields → Economic growth signal.
  • Inverted: Long-term yields < Short-term yields → Possible recession.
  • Flat: Minimal difference → Uncertainty.

Example

In 2022, India’s yield curve steepened due to RBI rate hikes.

🔢 G. Understanding Bond Duration

Duration indicates a bond’s price sensitivity to interest rate changes.

  • Macaulay Duration: Average time to receive cash flows.
  • Modified Duration: Shows price change for a 1% interest rate move.

Example

If a bond’s duration is 5 years, a 1% rate rise reduces price by around 5%.

💵 H. Introduction to the Money Market

The money market handles short-term (less than 1 year) debt instruments.

Instruments

  • T-Bills: 91, 182, 364 days (issued by RBI).
  • Commercial Papers (CPs): Corporates raising short-term funds.
  • Certificates of Deposit (CDs): Issued by banks.
  • Call Money: Overnight lending between banks.

Example

A 91-day T-Bill bought at ₹98.50 yields approx. 6.1% annual return.

🇮🇳 I. Government Debt Market Overview

Comprises central and state government-issued securities.

Types

  • T-Bills: Short-term government securities.
  • Dated Securities: Bonds maturing between 5–40 years.
  • State Development Loans (SDLs): Issued by states.

Example

The 10-year G-Sec (IN102023) serves as a benchmark bond.

🏢 J. Corporate Debt Market in India

A key source of long-term funding for businesses.

Types of Bonds

  • Non-Convertible Debentures (NCDs)
  • Convertible Debentures (CDs)
  • Perpetual Bonds
  • Green Bonds (for ESG projects)

Example

HDFC issuing NCDs at a 7.5% coupon to fund operations.

💼 K. Small Saving Instruments

Government-backed savings options with attractive and safe returns.

Popular Schemes

  • PPF: 15-year tenure, tax benefits, 7.1% return (example).
  • NSC: 5-year lock-in, tax deductions under Section 80C.
  • Sukanya Samriddhi Yojana (SSY): For girl child education.
  • Kisan Vikas Patra (KVP): Investment doubles in a fixed period.
  • SCSS: High-yield scheme for retirees.

🎯 Conclusion

Fixed-income investments offer a balanced approach for investors seeking predictable returns and lower risk compared to equities.

  • Government securities → Safety & stability.
  • Corporate bonds → Higher yields, but with additional risks.
  • Small saving schemes → Reliable options for retail investors seeking guaranteed returns.

By understanding these instruments, investors can build a well-diversified portfolio aligned with their financial goals.