Fixed Bonds Can be a Safe Bet

What is a Fixed Bond?

A fixed bond is a debt instrument issued by a company or a government entity. This financial instrument has a definite maturity period and interest rate, which is predetermined. The interest rate on a fixed bond is generally higher than that of fixed deposits, but lower than the rate on a stock. Fixed bonds are ideal for conservative investors looking for a moderate amount of risk for a higher return. These can be issued either in the form of a traditional paper instrument or electronically. Fixed bond funds are a collective investment scheme where a fund manager makes investments in fixed-income instruments across various sectors to generate profits for the investors. Fixed-income mutual funds are one of the easiest ways of investing in fixed-income instruments. The main advantage of fixed bonds is that you know exactly how much you will make as a return on your investment. Before you start investing in fixed-income instruments, it is important to understand the difference between a fixed deposit and a fixed bond. Fixed deposits are time deposits where you are guaranteed a rate of return equal to the interest rate offered in that year. Fixed bonds, on the other hand, are like a hybrid of a fixed deposit and a debt instrument. You are guaranteed a rate of return, though not as high as that of a fixed deposit.

How does it work?

The interest rate on the bond is fixed and the maturity period is mentioned in the bond details. You can hold these bonds for the full term to get the interest amount. Interest rates on fixed bonds are higher than that of fixed deposits. You can choose to sell these bonds in the secondary market at a price higher than the price at which you bought them. Important things to know about fixed bonds are - the coupon rate, the tenure of the bond, the interest payment schedule, the type of the bond, and the yield to maturity (YTM). The coupon rate is the interest rate that you will get on the bond. It is the rate that is guaranteed for the entire term. The tenure of the bond is the length of time that you will hold the bond before maturity. The interest payment schedule is the amount of money that will be paid to you periodically.

Difference between Fixed Bonds and FDs?

Fixed deposits are a highly liquid product, which means that you can withdraw the money at any time. This, in turn, means that you will not get the full interest rate that is offered in that year. Fixed bonds offer a higher interest rate than a fixed deposit, which is a good incentive for the investor. You can keep the money invested in a fixed bond for a fixed term, which is the maturity period. Like fixed deposits, interest rates in the market are crucial for deciding the rates on fixed bonds. If interest rates are low, then the rates on fixed bonds will also be low. If interest rates are high, then you will also get a high rate of return on your fixed bond investment.

Pros and cons of fixed bonds

- Fixed deposits are a safer option as compared to fixed bonds. The interest rates on both fixed deposits and fixed bonds can be low if the interest rates in the market are low. The interest rates on fixed deposits are tied to the rates in the market. With fixed bonds, the interest rates are pre-decided.

- The biggest advantage of fixed bonds is that you know exactly how much you will make as a return on your investment.

- The risk of defaults is lower with fixed bonds compared to fixed deposits as these are debt instruments. If a company defaults, then the investor is paid back by the government. For fixed deposits, the government does not have any responsibility in case of default.

- Fixed bonds have low liquidity as compared to fixed deposits. You cannot withdraw money at any time.

- You can redeem a fixed bond before the maturity period, but you may have to pay a penalty. This is known as an early redemption charge.

- With fixed bonds, you may not get the full interest rate that is offered in that year. It can be less due to the market interest rates at the time of investment.

Fixed-Return Bonds or FRBs

A fixed-return bond is an investment product issued by the government. It is a long-term debt instrument with a maturity period of 10 years or more. These government bonds are issued at a fixed rate, which means that the interest rate is not adjusted. The rate of interest is usually high, and it is considered to be a safe investment due to the low risk associated with it. These bonds can be purchased directly from the government or brokerages. If you are a risk-averse investor and looking for a steady return, fixed bonds suit your needs. These are investment instruments issued by companies or governments that promise a fixed amount as a return. Fixed-return bonds are issued for a specified period. The interest rate is also fixed, which means that it does not change even if the market interest rate fluctuates. Investing in fixed-return bonds is a safe and conservative way to earn more from your investment. You can invest in these instruments through mutual funds or directly through the issuers.

Bottomline

Fixed bonds are a type of long-term debt instrument issued by a company or a government entity. These fixed-income investments promise a fixed amount of return, which is determined at the time of investment. You can choose to invest in a fixed-return bond either through a mutual fund or directly through the issuer. If you are a conservative investor looking for a steady return on your investment, then fixed bonds are the right choice for you.