Fixed-income asset

Fixed-income asset
Source: Tavaga

A fixed-income asset of an investor is one that provides fixed periodic payments, and at the end of its maturity (holding period), repayment of the principal sum invested.

Types of fixed income asset

Source: Tavaga

For the issuing company, a fixed-income product is a form of debt, and it is obliged to pay its debt before rewarding its equity holders (of common shares, for example). For the Investor, this is a lower risk product as the payment obligation supersedes that on equity shares.

A fixed income product allows governments, corporations, and municipalities to take debt from the public to fund their projects.

Fixed-Income asset allocation

The asset allocation among various kinds of fixed income assets depends on the ability of the risk-taking ability of the Investor and the returns desired. For ex:- Corporate bonds generally involve a high amount of risk as compared to Government bonds, but simultaneously the returns are high. They have the ability to overperform a benchmark Index. 

Investment also depends upon the credit rating of these bonds by various credit rating agencies such as Crisil (Credit Rating Information Services of India Limited), S&P, Fitch, ICRA Limited, CARE (Credit Analysis and Research Limited), Moody, SMERA (Small and Medium Enterprises Rating Agency of India) and India Ratings and Research Pvt. Ltd.

The corporate rating starts from “AAA,” with it being the best to “D” with it being the worst. 

Also, the FICO score can be calculated in order to assess the creditworthiness

The ratings are done on the basis of various factors such as Future growth plans of the company, current market share, past performance, Investor’s sentiments, Market position, Revenues, Net worth, Type of the service/product that is being offered in the market.

Various risks that are associated with these bonds are Inflationary Risk, Interest Rate Risk, Credit, and Default Risk. The pricing of the bonds also depends on the extension of exposure to these risks.