Individuals, who invest their hard earned money, know how to park their capital in various traditional asset classes like real estate, fixed deposits and commodities (mainly gold and silver).This tradition has been followed over the years in the country like India. Therefore, it is safe to assume that they know the benefit of the diversification in the portfolio. But simultaneously these people are not actually fully aware of the assets which exists above traditional assets i.e. equity, fixed income security, alternative investments, etc.

Usually traditional investments provide a sense of safety and a comfort to an individual because of the environment in which one has grown up, by looking the pattern of investments done by his family members. But in the new era, the definition of investments has been expanding and more assets are getting included in the umbrella.

Equity in India has still not reached the acceptance level which it gets in developed countries and even in some developing countries. This is because, equity in India is considered at par with gambling, daily buying and selling is what comes to one’s mind when we talk about equity. But the reality is that there is much more to equity investing than what meets the eye. Investors often miss the powerful compounding effect which equities can gives in the long run.

Apart from equities, there is one more asset class which is not given due importance, Fixed Income Securities. Fixed Income Instruments are less risky than equity and more liquid than real estate investments.Therefore, an investor who is looking for diversification at less volatility and more liquidity, should consider investing in fixed income security. Brief idea about fixed income instruments is given below.

What is Fixed Income Security?

• It is basically a loan given to the issuer, which can be Government, Corporation or other entity to finance and expand their operations. It refers to a type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. For example, the borrower may have to pay interest at a fixed rate once a year and repay the principal amount on maturity to the investors. Normally, the debt instrument is in the form of bond and the borrower is termed as bond issuer and lender termed as bond holder.

Important terms to understand before investing in Fixed Income Instruments:

• Issuer: Bonds can be issued by Government, public and private company and any financial institutions.
• Maturity: It is bond’s tenor. It is the period during which its owner will receive interest payments on the investment.
• Par value: The principal amount that is repaid to bond holders at maturity; also known as face value, maturity value or redemption value.
• Coupon Rate: It is the percentage of par value that issuer agrees to pay to the bondholder annually or semi-annually or even quarterly as interest.

Types of Fixed Income Security and their benefits:

Investment Grade bonds: These bonds are issued by companies who have a strong balance sheet and raise capital for the expansion and growth plan. These bonds provide higher yield as compared to government bonds

Government bonds: These bonds generally termed as credit-risk free bonds as they are issued by the government and return guarantee is given by the government itself. As compared to other bonds they provide lower yield but some of them also provide taxation benefit.

High yield bonds: These bonds are issued by companies who have a weak balance sheet and raise capital to improve the performance of the company. These bonds as name suggest provide high yields as compared to the above two bonds but comes with an element of a high risk.

We hope that after reading the above content one must get convinced to include fixed income investments in his/her portfolio as it provides a way to get regular income in the form of Coupon Payments and also helps in diversification because of the low volatility. Fixed income as mentioned before provides more liquidity than real estate investments.

If one wants to plan for his/her retirement, fixed income investment can be a perfect fit for their portfolio, because of the element of regular income and low risk. Obviously there are other investments which can be included in their retirement portfolio; let’s say equity, equity investment can provide a huge return over the long term but it comes with a risk of high volatility, i.e. what if at the time of selling the equity security it is going through a downward trend in prices. Therefore it is very necessary to contribute a part of your capital in safe investments and one of such is the fixed income securities.

Apart from investing in various assets, planning of adequate cash in hand is also very important to meet the emergency needs. This is very important to assess based on you and your family situation, like if there is an elderly person in a family, there is a possibility of various medical expenses and during such periods holding cash can be of great help. Also, in some kind of contingency situation, like Covid, which is one in a century event, a pandemic, gave us the lesson how one needs to be prepared for any emergency situation both mentally and financially.

Hence, one should take care of his/her allocation in various investments by combining current and future scenarios and select the best allocation which has the ability to fulfill one’s goals be it education, marriage planning of one’s child, vacation planning, retirement planning or keeping aside money for your emergency needs.