When it comes to investing, there are various options to choose from. You can invest in stocks, which give you a share in the ownership of a company, or in bonds, which are loans that are given to a government or company. One option that is growing in popularity is investing in fixed income securities.
It can be comforting to know that some investments will always hold their value in uncertain times. Fixed income securities are one such investment, and they are likely to be a wise choice for investors in 2022.
According to the Federal Open Market Committee (FOMC) meetings, the fed rate (which is now set zero) is expected to be increased in the coming year by as much as three times.
In India, the Reserve Bank of India (RBI) might also increase the interest rates in the coming year. This is because the spread between U.S. and Indian government bonds will narrow.
In Feb 2022, the RBI did not change the repo rate (i.e., the rate at which the RBI lends to banks) for the tenth time in a row. It is currently at 4%. However, this does not guarantee that the RBI will not increase the interest rate in the next session.
So, what will be the impact of change in interest rates on the fixed income securities market? Why bonds are a good choice in 2022? In this blog, all your doubts will be cleared.
Before that, let us talk about fixed income securities.
What is fixed income security?
Fixed-income security or debt security is an investment that pays a set amount of money at regular intervals known as interest (coupon). The holder of fixed income security receives this coupon payment (interest) until the security reaches maturity, at which point the investor will receive the final principal amount. Basically, an investor is lending money to the issuer in this instrument.
They are considered to be low-risk investments, as they are backed by the creditworthiness of the issuing company or Government. As a result, they are often favoured by those looking for a stable source of income.
Advantages of investing in fixed income securities
Investing in fixed income securities is a common choice by many; some of the benefits of fixed income security are:
- Stable & Secure - Fixed income securities are considered a safe investment. This is because they offer a steady return, which can help to protect the investment portfolio against market volatility.
- Predictable Income - One of the main benefits of investing in fixed income securities is that investors know exactly what they are getting. This is unlike when you invest in stocks, which can be unpredictable.
- Diversification - Fixed income securities can help diversify the portfolio, minimising the overall risk.
- Tax Benefits - In some cases, investors may receive tax benefits from investing in fixed income securities.
Types of fixed income securities
Various fixed income securities are available in India; the list of fixed income security is as follows:
- Public Provident Fund (PPF): PPF is amongst the safest fixed-income securities in India. It provides long-term retirement planning options to individuals who are not covered by provident funds of their employers or those who are self-employed.
- Fixed Deposits (FDs): A fixed deposit is a very safe instrument and, as the name suggests, offers a fixed rate of return.
- Government Securities: These securities are considered the safest investment option as the Government issues them. Since the Government issues them, they carry less risk and lower interest rates than other fixed-income securities.
- Corporate Bonds: Bonds that are issued by corporations are known as corporate bonds. They carry a higher risk than government securities; therefore, the interest rates offered by them are usually higher.
- Debt Mutual Funds: They are investment funds that pool money from different investors and invest in various debt securities.
Other instruments include National Savings Certificates (NSC), National Pension Scheme (NPS), Sukanya Samriddhi Yojana (SSY) Scheme, etc.
Is investing in fixed income securities a good choice in 2022?
2022 can be more challenging than 2021 from both a fixed income and equities perspective.
High inflation, expectations of increasing Fed rates, slow economic growth, third covid wave, and tighter monetary policy are some of the concerns for the year 2022.
These factors could impact almost all asset classes, whether bonds, equities or real estate.
The RBI believes that inflation will be moderate in the first half of 2022-2023.
To beat inflation or to meet the increase in Fed rates, the RBI may also raise the interest rate in the future.
An increase in the interest rates could cause the bond prices to fall, resulting in losses for the investors who do not hold the bond till maturity.
Investors who wish to buy bonds in the future and hold the bond till maturity could gain from the rise in interest rates as they will receive a higher coupon.
Further, fixed income securities like PPF, Bank FDs, NSC and NPS could also benefit from increased interest rates as they will get a higher interest income.
It is also advised that the investors invest in low duration bonds to face less impact of interest rates.
As per a Morgan Stanley (NYSE:MS) report, in early 2022, India might be included in the global bond indices. This could bring more capital inflows to the Indian debt market, thus increasing liquidity and bringing confidence in the Indian debt market.
However, in the year 2022, due attention can be given to fixed income securities so that investors can earn a reasonable yield.
Conclusion
While there are inherent risks associated with any investment, it appears that investing in fixed income securities may be a wise choice for individuals looking for stability and modest returns in 2022. They are a good choice for risk-averse investors looking to safeguard their capital.
By taking a closer look at the economic indicators and the historical trends for fixed income securities, investors can make a more informed decision about whether or not this type of investment is right for them.