Investing Tools for Retail Investors to Create Streams of Fixed Income in 2022

Fixed income securities are sought after as the ideal investment path that offers portfolio diversification, flexibility and higher interest rates.

With the massive rally in stock markets since March 2020 and high stock valuations, investors are looking for more investment opportunities.

Fixed income securities are sought after as the ideal investment path that offers portfolio diversification, flexibility and higher interest rates.

Investment tools beyond traditional fixed deposits;

Exchange Traded Funds (ETFs) track underlying asset classes such as stocks, fixed income, commodities, etc. By now, everyone is quite familiar with equity-linked ETFs that track the respective index or basket of stocks.

ETFs that invest in bonds and are traded on exchanges are relatively new to the investing community. Since bond ETFs are passive funds, they offer the combined benefits of liquidity, transparency and profitability. They track the underlying bond indices – PSUs, government or corporate bonds.

There are target-maturity bond ETFs that have maturities defined as three years, five years, or ten years. Investing in these fixed-maturity ETFs can help you achieve your medium- to long-term financial goals.

As their name suggests, MLDs are debt securities issued by legal entities whose returns are linked to the performance of the bond markets. Unlike vanilla bonds, MLDs pay no coupon before maturity. The repayment at maturity is made up of the repayment of principal and market-related returns. Gains on MLDs are taxed like equity. Long-term capital gains on securities held for more than one year are taxed at 10%.

MLDs are rated by credit rating agencies, which helps you know the creditworthiness of the borrower. Investing in highly rated debentures has the potential to generate higher returns.

MLDs are no longer an investment avenue accessible only to ultra HNIs. Your wealth manager can help you understand the nuances of MLDs, and you can invest starting with a minimum investment value as low as Rs 10,000.

  • Non-convertible debentures

NTMs are debt securities with a fixed maturity and a fixed interest rate that cannot be converted into shares. The interest payment frequency – monthly, quarterly, semi-annually or annually – is specified on issue. MNTs cannot be withdrawn prior to maturity; however, they can be sold on the secondary market.

DEMs can be secure or unsecure. The assets of the issuers secure secured NTMs and the entity is obligated to repay the amount borrowed. On the other hand, unsecured NTMs do not guarantee repayment of the principal amount in case the company goes bankrupt.

Investing in NTMs depends entirely on your risk appetite. You can opt for secured MNTs with high credit ratings if you have a low appetite for risk. It is important to note that NTMs can generate higher returns and are not risk-free or tax-exempt assets.

Corporate FDs are fixed term deposits offered by corporations and NBFCs. They offer higher interest rates compared to traditional FDs and savings accounts. Corporate FDs are rated by credit rating agencies that help you analyze their financial stability to repay lenders.

Corporate fixed deposits have the option to choose the term ranging from 12 months to 60 months. They are liquid as you can avail a loan against the FDs or get out in an emergency.

Cumulative fixed deposits have the power to accumulate as interest earned is reinvested over the term of the term. Non-cumulative DFs are a source of regular income. The interest payment frequency – monthly, quarterly or annually – can be chosen according to your income needs.

Floating Rate Indian Government Bonds

The Reserve Bank of India issues Indian government bonds when the government borrows money. They pay coupons at periodic intervals specified when issued. They can be purchased for long-term financial goals since they have a seven-year lock-in period. They are the safest for the risk averse investor as they offer capital protection and regular interest income. Since these issues fill up quickly and are available for a limited time, investors should keep an eye out for new issues.

Transition in interest rate scenario

All central banks have taken a dovish stance to help the world recover from the economic setbacks due to the outbreak of the pandemic. Lower interest rates increased market liquidity, leading to inflationary pressures. With demand picking up, central banks have started considering liquidity tightening measures in 2021.

Now that much of the population has been vaccinated and governments are better prepared to deal with the various mutations of the virus, it won’t be too far for central banks to start raising interest rates. Recent stock market volatility reflects expectations of rising interest rates. Now is a good time to diversify your fixed income portfolio to take advantage of the transition phase in 2022.

by, Anshul Gupta, co-founder of Wint Wealth

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