Fixed Income – Is there something beyond Bank FDs?


Would you be surprised if your Fixed Deposit gave you more than 15% return? Would you be more surprised if the same FD generated negative returns at some other time? If so, you do not realize the importance of Fixed Income asset class and are not utilizing its true power in your portfolio.

It is an asset class which is least understood and seldom used.

Any Fixed Income instrument involves lending the money, getting fixed coupons (aka interest) through the duration of the investment and getting your principal back at the end of tenure. Your returns would be the same as coupon rate, if you hold it until maturity, just like in a normal bank FD.

However, you could realize even higher (or lower) returns if you sell it before maturity. Bonds and NCDs are such instruments which can be bought/sold in the market.

The returns in such a scenario would be:

Total Returns = Coupon rate + Capital gains

The second component (i.e. Capital Gains) happens when you buy it at a lower price and sell at a higher price. Most individual investors are not aware of the dynamics of this component. The price of such an instrument fluctuates based on prevalent interest rates in the market (which further is driven by RBI monetary policy). This augments and increases the overall returns for the investor.

Another benefit of Fixed Income instrument is that it plays an important role in asset allocation and provides diversification to Equity investments in your portfolio.

While you are investing next time, please do explore this option a little bit better and realize the new possibilities it can bring to your portfolio.

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