Fixed income or debt securities are capital market instruments that generate fixed income in the form of interest payments, also known as coupons, at regular intervals and pay the face value of the security upon maturity. Since the timing and amount of cash-flows from these securities (interest and principal payment) are predictable to a certain degree, fixed income securities are less risky than stocks. The most common form of fixed income securities are bonds – both Government and corporate. Government bonds in India are known as G-Secs or Gilts; corporate bonds are commonly known as debentures. Some very short duration fixed income securities, like treasury bills, commercial papers etc do not pay regular interests but are issued at a discount to the face value of the security. Debt mutual funds invest in fixed income securities.
Fixed income securities trade in two financial markets – money market and bond market. Instruments with high liquidity and very short maturities, less than 1 year, e.g. treasury bills, commercial papers, certificates of deposits etc trade in money market. Money market instruments are thought to be one of the safest asset classes. Government and corporate bonds trade in the bond market, also known as the debt market. Government bonds or G-Secs of different maturities and corporate bonds trade in the bond market. The most important factor in pricing of fixed income securities in the market is prevalent interest rates of the particular maturity profile of a security (also known as the yield curve); credit rating is another factor.
Different types of fixed income securities have different risk profiles – sensitivity to interest rate changes and credit risk, in the case of corporate bonds or debentures. Accordingly, different types of debt funds have different risk profiles, depending on their investment strategy - the type of fixed income securities the funds invest in. Investors should understand the risk factors of a debt fund clearly before investing.
