May 25, 2012, 10.42 AM IST
'It is always better to be safe than sorry.' This quote holds true for all the investments you make even for Fixed Income products. Read on to know what are the key points that you should check before investing in Fixed income space.
In times of crisis there is always the question of where an investor should park their money. One alternative that becomes a preferred investment is that of fixed income investments. In the context of fixed income instruments in India the situation is even more confusing as there is no clear direction in the way in which interest rates are going currently. Add to this the crisis in Europe and the only thing on the minds of investors is the way in which they would want their investments to behave. Here are a few things that they can concentrate on to help them in their efforts.
Protection of capital - One of the main issues that investors would want to avoid during these tough times is to actually end up losing the capital that they have invested. While fixed income investments are considered to be safe investment there are several choices or options within this area where the investor could find that they have actually lost out in case things do not go as expected. A very good example of this is company fixed deposits or even debentures that are not secured. In case the entity that is issuing the instrument falls under some financial difficulty then they would end up holding back the capital amount of the investment since there is no money to repay the amount and the investor would suffer. This is the reason why there has to be a look at the protection of capital especially when there is a large crisis and this can be done by sticking to instruments of entities that are strong financially.
Regularity of interest - The entire purpose of the fixed income investment is to ensure that there is some sort of regular interest coming in for the investor. This can be severely disrupted if proper attention is not paid to the selection of the instrument and if there is an entity that is not able to pay the interest regularly due to some financial trouble then this could spell trouble. This is the reason that there has to be focus on the existing financial position of the entity that is issuing the fixed income instrument so that it will be able to pay off the interest on the investment. A little bit of study of the credit ratings as well as the financial performance of the entity and the nature of the instrument will be helpful as it will clearly highlight any problems that might arise in the future. If this is considered then there would be a situation where the high risk investments can be avoided and the individual investor will be able to concentrate on getting the right investments that will also reduce the tension in the investment.
Time period of investment - The time period of the instrument should be such that there is no worry for the investor once the investment is actually made. There are times when it might seem to be better to go in for a short time period because this will ensure that there is no lock in of the money for a longer time period and hence if there is any problem then the amount will be available for further investments. On the other hand it might also be a better idea to get a good investment vehicle and then put the money away for a longer time period. The exact choice would differ according to the situation but this needs to be taken into consideration when the overall decision is being made.
Liquidity - For any investor it is better to be safe than sorry and hence they should first look at all the measures that will provide some element of liquidity for the investment. There might not be the need to exercise this option but if there is some way in which the liquidity is present then it would be easier to deal with the entire situation if there is an emergency. Liquidity means that there has to be a way in which there is some access to the capital either directly in the form of return of the invested amount or indirectly through the availability of a loan. It is always better to be able to have some access to the money and hence during crisis the presence of this option is a good thing.
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Disclaimer: Views expressed in this article are entirely personal.
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