Understanding fixed-income investments

As the name suggests, fixed-income investments pay investors a fixed income from the investment date until it matures. This fixed income is either paid out in the form of fixed interest or dividend payments. Apart from offering a steady income to investors, this type of investment is also immune to changes in market dynamics, thus offering a safe investment option.

For the layperson, a fixed-income investment, like a Provident Fund or Fixed Deposits (FD), offers an alternative to low-interest-bearing savings accounts. Also known as debt investments, fixed-income investments offer a safe and assured return on your deposit. For this reason, seasoned investors prefer to allocate a portion of their portfolio to debt investments, which can insulate it from market uncertainties.

Including debt investments in your portfolio is wise, as they offer low risk and low reward. Young investors can take on more risk with equities, while older individuals should consider incorporating debt investments to manage risk effectively. For retirees, a fixed-income-heavy portfolio provides regular income and reduces short-term risk. Additionally, fixed-income investments offer several other benefits that make them valuable.

• Income generation: Fixed-income investments generate a regular income. Interest-bearing instruments like PPF and FD follow a regular interest accrual schedule, while others have a regular payout option. For a regular investor, the interest accrued paves the way for higher growth through compounding interest. For a retired person, fixed-income investments can be a source of regular income.
  
• Capital preservation: Through fixed-income investments, you can preserve the fund's value. If you have a windfall or excess funds, putting them in a fixed-income investment can keep your investment intact. Investment in short-term debt instruments ensures capital preservation for funds that may be required soon.
  
• Safety: Most of these instruments are backed by a sovereign guarantee, ensuring no loss on the investment. This makes such instruments ideal for diluting the overall risk of an investment portfolio while benefitting from returns that are usually higher than average. In addition to this, as debt instruments, they have a preferential claim on the issuer's assets over equity shareholders.
  
• Portfolio diversification: Exposure to only equity investments can make a portfolio prone to market uncertainties. Astute portfolio management calls for a diversified portfolio that primarily comprises equities, debt instruments, real estate, cash, gold, etc.

Now that you understand what is fixed income investment and how it can benefit your portfolio, here are some choices you can consider:

Government bonds

These bonds, such as treasury bills, state development loans, and government securities (G-Secs), are issued by state and central governments. You can invest in these bonds, RBI bonds, and sovereign gold bonds through various online platforms, and you can start by opening an HDFC Demat account.

Corporate bonds

Companies raise money for businesses by offering bonds at a fixed interest rate and duration. A good idea is to check the creditworthiness of the issuing company when investing in corporate bonds, as it can play a role in the success of your investment.

Fixed Deposits

You can open an FD account with a bank or certain financial institution and choose from various tenures. The interest income earned can be reinvested or withdrawn, depending on your needs. FDs offer a higher rate of interest than savings accounts.

Insurance Guaranteed Income Plans

Insurance plans that disburse maturity amounts on the death of the policyholder or maturity are also used for the dual benefit of life insurance and maturity income.

Mutual Funds

Debt Mutual Funds invest in a bouquet of debt instruments, including government and corporate bonds and other money market instruments. Online platforms have made investing in these instruments seamless and easy by providing expert mutual fund portfolio management. This lets you plan your investment depending on your needs, whether systematic saving through SIPs, tax saving purposes, investing for the long-term or in liquid funds, etc.

Provident Fund

PF is a long-term investment that is fully secured and offers high returns through good interest rates and compounding of interest.

Opening a Demat Account with HDFC Bank simplifies your investment journey across various instruments tailored to your risk appetite and portfolio goals—all accessible from a single platform. Enjoy hassle-free account opening with no paperwork, no account opening charges, and competitive brokerage plans. With seamless trading and a host of other benefits, you can confidently join over 3 million satisfied HDFC Bank Demat customers. Start investing in fixed-income instruments today with India's leading bank!

To apply for a Demat Account at HDFC Bank, click here.

Now that you know about various investments, start investing now!

*Terms and conditions apply. This is an information communication from HDFC Bank and should not be considered as a suggestion for investment. Investments in the securities market are subject to market risks; read all the related documents carefully before investing. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.