Fixed Income Asset Class

Fixed Income Asset Class

Fixed income is as “Asset Class” generally defensive in nature. It provides capital stability, income, liquidity and diversification to other growth- oriented asset classes. Fixed income asset provides fixed income stream. The investor gets returned, by way, of interest to the investor for a particular fixed period of time. Upon maturity, the investor gets back their principal along with Interest due if any. Irrespective of any market fluctuation, the income for the investor is fixed & that is the reason it is usually called as “Fixed Income”.  However, fixed income assets historically have had a lower rate of return than other riskier asset class.

Bond, company deposit, Term deposit is a common example of the fixed deposit instrument. Below mentioned table will give you a complete picture of the various fixed deposit instrument available in the market.

Types of Fixed Income

 

Various Fixed Income Instrument
Asset class Risk Return potential Liquidity Time horizon
Bank Deposit Negligible Low High Short Term
Debt Instrument Nil Moderate Low Long term
Bonds & debenture Average Moderate/ High Low Medium term
Mutual Fund Debt scheme Average Moderate Low/ High Short / Medium term
Fixed maturity plan Average Moderate Low Medium term
Govt. Deposit Nil Moderate Low Long term
Liquid Funds Average Low/ moderate High Very short term

 

Why Fixed Income as an Asset class

One has to see that fixed income instrument can play a vital role in managing the entire risk of the portfolio. It certainly provides a balanced approach to the overall portfolio. Few advantages of Fixed Income are –

1)    Low Volatility compared with any other asset class.

2)    Can match your cash flow requirement for short and long term.

3)     Can help an investor to create a diversified portfolio. Fixed income has pretty low correlation with other risky asset class.

4)    Capital Preservation – Fixed income instrument provide capital security.

 

But one has to understand that

1)    The money is locked, and there is an exit barrier for investment.

2)    Generally many of the fixed income assets are not traded in the marketplace. Even if traded, there is a liquidity issue with most of the asset class.

3)    Recently due to quantities easing (QE) policy by the fed, the long term interest is quoting at their bottom & closing below the inflation level.

 

Conclusion

Generally, fixed income instruments provide fixed income options and very high capital safety. However, there are credits and inflation risk attached with fixed income asset class. One should include these instruments while building a portfolio for any investor.  Yet, at the same time, it is important to understand the risk profile of the investor and one should accordingly allocate weightage to it. This certainly provides stability in the portfolio. A portfolio can benefit from reducing volatility of return due to this asset class.

 

 

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2 Comments to Fixed Income Asset Class

  1. […] Fixed Income Asset Class Fixed income is as “Asset Class” generally defensive in nature. It provides capital stability, income, liquidity and diversification to other growth- oriented asset classes. Fixed income asset provides fixed income stream. The investor gets returned, by way, of interest  […]

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