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.
- Bond funds issued by Government.
- Invest in bonds issued by corporate companies.
Let 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 |
| Re-Investment |
Capital Per Year
| 8% Return |
|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.
- Tutorial Course - Basics of Banking and Financial Services for Beginners -
» e-Learning Chapter 1: What is Bank and Role of Bank in Economic Development.
» e-Learning Chapter 2: Different Types of Financial Services Provided by Banks.
» e-Learning Chapter 3: Different Types of Banking and Financial Institutions.
» e-Learning Chapter 4: What is Retail Banking and Services provided by the Banks.
» e-Learning Chapter 5: What is Commercial Bank and Services offered by Banks.
» e-Learning Chapter 6: What is Private Banking and Services offered by Best Banks.
» e-Learning Chapter 7: What is Investment Banking and Services offered by Bankers.
» e-Learning Chapter 8: What is Investment and How to Start Systematic Investment Plan.
» Currently Reading: What is Fixed Income Securities Market.
» e-Learning Chapter 10: What are Bond Funds and Difference between Stocks and Bonds.
» e-Learning Chapter 11: What is Stock Market and How to Invest in Stock Market.
» e-Learning Chapter 12: What is a Mutual Funds and Types of Mutual Funds with Examples.
» e-Learning Chapter 13: What is Futures Trading? Who, Where, How to Trade in Future Contracts.
» e-Learning Chapter 14: What is Options Trading and How does Options Trading Works.
» e-Learning Chapter 15: Banking Quiz – Basics of Banking and Financial Services for Beginners.