What is Fixed Income Securities Market: Investing for Beginners


Fixed Income Definition:

Securities which have limited or minimal risk to the principle with the fixed returns paid on the investment. These returns can be classified by quarterly, half-yearly or yearly returns on the principle investment and the capital amount is returned on the maturity with the returns to the fixed income investors. Normally you can expect returns between 6 percent to 10 percent in fixed income funds. Investors with these kinds of investments are mainly classed as “Restricted risk with limited return investors”.

“Fixed income investments are highly suitable for the minimal risk taker investors”. Risk of losing capital is calculated toward inflation rate. For example: If your high yield fix income stocks / bonds assure you for 8 percent returns whereas inflation possibly rises to 9 percent for few years that means you are losing percent per annum when inflation is more than your returns and you are not making money when inflation is equal to your investment returns for those years.


Categories of Fixed Income Securities are:

  • Fixed income deposits issued by Banks.
  • Invest in bonds issued by corporate companies.

Wiki Finance pedia - e-learning course on Investment wikipedia Chapter - fixed Income SecuritiesLet us take an “example of fixed income securities” to understand further:

Example of Fixed Deposit Income (FD):

Let us calculate the retirement and financial planning with few simple assumptions on Fix income deposits issued by Banks:

  • You intend to invest Rs.1,30,000/- (approx. around $2,000) year on year in the fixed income scheme provided by your bank.
  • Your net capital re-evaluated every year while include your initial capital per year + investment returns per year + Rs.1,30,000/- per year as a plan of systemic investment.

Going by these assumptions, here is how the cash balance will look like in 20 years as per Table.

No. of Years  Fixed Deposit 

Per Year

 Re-Investment 

Capital Per Year

 8% Return 

on Investment

 Re-Investment 

Capital Valuation

                1                1,30,000                 1,25,000                        10,400                1,40,400
                2                1,30,000                 2,70,400                        21,632                2,92,032
                3                1,30,000                 4,22,032                        33,763                4,55,795
                4                1,30,000                 5,85,795                        46,864                6,32,658
                5                1,30,000                 7,62,658                        61,013                8,23,671
                6                1,30,000                 9,53,671                        76,294             10,29,964
                7                1,30,000               11,59,964                        92,797             12,52,762
                8                1,30,000               13,82,762                     1,10,621             14,93,383
                9                1,30,000               16,23,383                     1,29,871             17,53,253
              10                1,30,000               18,83,253                     1,50,660             20,33,913
              11                1,30,000               21,63,913                     1,73,113             23,37,026
              12                1,30,000               24,67,026                     1,97,362             26,64,389
              13                1,30,000               27,94,389                     2,23,551             30,17,940
              14                1,30,000               31,47,940                     2,51,835             33,99,775
              15                1,30,000               35,29,775                     2,82,382             38,12,157
              16                1,30,000               39,42,157                     3,15,373             42,57,529
              17                1,30,000               43,87,529                     3,51,002             47,38,532
              18                1,30,000               48,68,532                     3,89,483             52,58,014
              19                1,30,000               53,88,014                     4,31,041             58,19,055
              20                1,30,000               59,49,055                     4,75,924             64,24,980
 Total Cash Balance  in hand at the time of Retirement:             64,24,980

Above calculation results are quite disgusting:

  • After 20 years you have accumulated around Rs.64,24,980/- (approx. around $98,845).
  • Considering your expenses is fixed after retirement and expenses will continue to grow at 8%. It’s an adequate amount for 3 years post retirement life. But after 3 year onwards you will be into hell situation if you haven’t plan anything else for the retirement.

What does Term Bonds means?

Bond players are universally known as bond investors which come in a diversified role. In a simple term borrowing loans by corporate or government by the way of multiple investors with assurance toward fixed returns. The borrower / Issuer pledge to pay a fixed amount of interest (termed as coupon rate) yearly until maturity date. At maturity, the borrower / Issuer pledge to return the principal amount (termed as face value or par value) along with returns to the bond investors.

Let us understand by taking single chapter about fixed income saving bond funds, bond market in our next tutorial session.

 

  

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About Kiran Mehta

A greek, passionate blogger and traveller who loves to travel around the world to enhance knowledge and to share information thru various writings.

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