Fixed Income Trading: Meaning, How to Trade, Types & Benefits

Trading fixed income provides a unique way for individuals to invest in instruments that pay regular dividends or interest. Investments in fixed income products, such as bonds or debentures, allow individuals to earn a predictable income stream.

Unlike equities, fixed income instruments are subject to legal obligations to make timely payments. However, opening a trading account before you begin trading fixed income is essential. In this article, we will learn how to trade fixed income, types of fixed income and the benefits of fixed income trading.

What is Fixed Income Trading?

Fixed Income Trading is a technique for buying instruments that pay a regular dividend or interest. While equities carry high risk and inconsistent returns, Fixed income trading provides steady returns since their creators are legally obligated to make payments regularly.

With Fixed income trading, payout intervals and amounts are predetermined, so you know in advance how much and when you will receive payouts. Besides corporate and government bonds, you can also invest in fixed-income mutual funds and ETFs.

What Are Fixed-Income Instruments?

Until the maturity date, fixed-income instruments pay the investors a fixed interest rate or dividend. As soon as the date arrives, the instrument creator refunds the investors their principal.

There are a lot of fixed-income instruments, but corporate and government bonds are the most common. Basically, bonds are debt instruments, which means they work like loans, where companies issue bonds to borrow money from lenders. The company promises to pay a regular predetermined interest rate on the principal amount.

The Types Of Fixed-Income Products

These are the most common fixed income trading products:

Fixed-Income Mutual Funds 

Mutual Funds like these invest in debt instruments and bonds. Since these funds are professionally managed, investors benefit from their experience.

Fixed-Income ETFs

They work just like mutual funds and target specific durations, interest rates, credit ratings, etc. Additionally, it is managed by portfolio managers.

Corporate Bonds

Companies that want to raise money from the public issue corporate bonds. These companies' interest rates vary according to their financial condition and creditworthiness.

Treasury bills (T- Bills)

The government sets a one-year maturity date for these bills. Bills like these don't offer fixed interest rates but offer investors a return at maturity by allowing investors to buy them at a lower rate than the face value.

Treasury Notes (T- Notes)

A Treasury note has a two to ten years maturity period and is issued by the government. Here, the interest gets paid semi-annually, and the principal gets repaid when the loan matures.

How to Trade Fixed Income?

Here's how to trade fixed income products in India:

Get to know fixed-income

Find out what kinds of fixed-income products are available in India, like government bonds, corporate bonds, and debentures. Also, learn about their features, risks, and potential returns.

Open a trading account

Contact a stockbroker or financial institution that offers fixed-income trading services. Create an account with them. You can also open a free trading account online with blinkX. They'll help you open an account, without any long process all online from their app or website.

Pick a fixed-income product

Make sure you research all the fixed-income products out there. Consider things like credibility, credit rating, interest rates, maturity periods, and liquidity. Additionally, make informed investment decisions by talking to a financial advisor or expert.

Place trade orders

Once you've chosen your fixed-income product, place your trade order with your stockbroker or trading platform. Provide details like quantity, price, and other relevant info based on the product's requirements.

Monitor your investments

Make sure you keep track of your fixed-income investments. Keep an eye on any changes in interest rates, stock market conditions, or issuer-related news that might affect your holdings. Also, keep track of interest payments and maturity dates.

Sell or hold on to your investments

Depending on your investment strategy, a fixed-income product may be sold before its maturity date. You can do this by placing a sell order in your trading account. Alternatively, you can hold onto your investments until they mature to receive the principal and interest.

Always stay up-to-date

Follow market trends, economic news, and regulatory changes that may affect the fixed-income market in India. Adjust your investment portfolio according to your financial objectives and risk tolerance.

Benefits to Fixed Income Trading

You can trade fixed-income instruments for these reasons:

Getting steady returns

The regular dividends or interest payments earned from Fixed-Income trading instruments give investors a steady income stream. With predetermined payouts, investors know how much they're going to make.

Repayment Option

There is the option of repayment for most fixed-income trading instruments, where investors are repaid what they initially invested in full.

A Diversified Portfolio

Trading fixed-income instruments can help investors diversify and manage their risk-return profile. By investing in fixed-income trading instruments, investors can increase their overall risk appetite and invest in other high-risk assets.

A low level of volatility

Fixed-income trading instruments don't fluctuate like stocks, currencies, and commodities. The interest rate on these instruments is predetermined and doesn't change with the market. Investors are guaranteed interest payments because the issuer is legally bound to pay.

Risk-Free

A great advantage of fixed-income trading instruments is that they reduce risk to a bare minimum. These fixed-income trading instruments are backed by the government, so they're one of the safest investments you can make.

Conclusion

Fixed income trading allows investors to receive regular dividends or interest payments from instruments such as bonds, mutual funds, and ETFs. Due to the legal obligation of issuers to make timely payments, fixed income instruments provide stability and predictability.

To trade fixed income, you need a trading account. For easy trading, you can download the blinkX trading app. Based on creditworthiness, low brokerage, and insights they help you make informed investment decisions.

Moreover, Fixed income trading has a lot of benefits. The benefits of this investment include steady returns, repayment options, portfolio diversification, and reduced volatility. As they're often backed by the government, fixed income instruments are relatively low-risk investments.