The importance of including Fixed Income instruments in your portfolio | Motilal Oswal

Fixed Income instruments in your portfolio | Motilal Oswal

The stock market today is a dynamic place full of opportunities and means for investors to make money. Online trading has made it possible for people to invest in whatever prospects they deem worthy. This freedom in investment is one of the basic tenets of stock market trading, but with this freedom comes risk, volatility, and a lack of stability.

Oftentimes this freedom to invest your money in anything that appeals to you is accompanied by the fallacy to invest in riskier and riskier investments that promise greater returns. And although a fair amount of risk is good for any portfolio and leads to a healthy growth in its value, that risk and volatility needs to be balanced with stable investments that ensure a steady stream of income. 

But how do you ensure a steady income in your portfolio, within such a risk filled and volatile market? The answer to this question is a fixed income instrument. Let us take a look at what these instruments are and their importance in an investor’s portfolio.

  • Fixed income instruments

Before talking about fixed income instruments, let us first define what a fixed income is. 

Fixed income refers to financial securities that pay the investors a fixed rate of dividend or interest until their maturity date. 

Fixed income assets and securities provide investors with a predictable stream of cash flows, basically a set of stable dividends or interests. Fixed-income securities provide investors a fixed rate of return in lieu for lending their money. Investors are refunded the initial amount they invested—known as the principal—at the security’s maturity date. 

The most prevalent fixed-income instruments are corporate and government bonds. Debt securities are issued by the governments of different countries and by companies to raise funds for day-to-day operations and significant projects.

  • Importance of Fixed Income Instruments 

The stock market today is a very volatile place and even though that grants investors the opportunity to enjoy profits, it also breeds risk. Fixed income instruments can help investors mitigate this risk to manageable levels. 

When developing an asset allocation plan and for an investment portfolio with a relatively short time horizon, These instruments are a potent instrument for accomplishing a portfolio's goal, serving as the major counterweight to stocks and mitigating risk while online trading. 

Fixed-income securities are preferred by investors who want a predictable income with minimal risk. A steady source of income appeals to a wide range of investors, particularly retirees (or other groups who prefer avoiding risk) who require funds for day-to-day costs. Corporations may pay dividends, but they are not compelled to do so. On the other hand, they  are obligated to pay interest on their fixed-income securities.

Conclusion

Stock market trading is a volatile activity and comes with ample risks to balance its great opportunities. Hence, it is a great idea to bring some much needed stability to your portfolio by adding in some fixed income instruments like corporate or government bonds. This not only balances out the risk from stocks and other riskier investments but also gives you a stable stream of income. 

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