Different types of Fixed income instruments | Trust Mutual Fund (2024)

Different types of Fixed income instruments

We think of a FD but there are a range of fixed income instruments that a debt fund can potentially invest in.

A debt instrument differs from equity in 3 different ways.

• There is a stated interest rate or commonly known as Coupon rate which is offered.
• A tenure which upon completion the borrower must return the principal borrowed.
• A lender has no ownership in the company that has borrowed the money.

Fixed Income instruments come in various formats largely depending on the issuer. Here is a comprehensive list of fixed income instruments that a debt fund can invest in.

1. Corporate debt and securities (of both public and private sector undertakings) including Bonds, Debentures, Notes, Strips etc. These are instruments issued by corporate entities for their business requirements. They are generally rated by credit rating agencies, higher the rating lower the risk of default.
2. Securities issued by the Central and State Governments as may be permitted by RBI, securities guaranteed by the Central and State Governments (including but not limited to coupon bearing bonds, zero coupon bonds and treasury bills).
   • Central Government securities are sovereign debt obligations of the Government of India issued on its behalf by RBI. They form part of Government’s annual borrowing programme and are used to fund the fiscal deficit along with other short term and long term requirements. Such securities could be fixed rate, fixed interest rate with put/call option, zero coupon bond, floating rate bonds, capital indexed bonds, fixed interest security with staggered maturity payment etc.
     • State Government securities are issued by the respective State Government in co-ordination with the RBI.
3. Debt obligations of domestic Government agencies and statutory bodies, which may or may not carry a Central/State Government guarantee. These are instruments which are issued by various government agencies and bodies. They can be issued at discount, par or premium.
4. Treasury Bills (T-Bills) are issued by the Government of India to meet their short-term borrowing requirements.
5. Certificate of Deposits (CD) – CD is a negotiable money market instrument issued by scheduled commercial banks and select all-India Financial Institutions that have been permitted by the RBI to raise short term resources. The maturity period of CDs issued by the Banks is between 7 days to one year, whereas, in case of FIs, maturity is between one year to 3 years from the date of issue. CDs may be issued at a discount to face value.
6. Commercial Paper (CP) – CP is an unsecured negotiable money market instrument issued in the form of a promissory note, generally issued by the corporates, primary dealers and all India Financial Institutions as an alternative source of short-term borrowings. They are issued at a discount to the face value as may be determined by the issuer. CP is traded in secondary market and can be freely bought and sold before maturity.
7. Bills Rediscounting (BRD) – BRD is the rediscounting of trade bills which have already been purchased by/discounted with the bank by the customers. These trade bills arise out of supply of goods/services.
8. Repos/Reverse Repo: Repo (Repurchase Agreement) or Reverse Repo is a transaction in which two parties agree to sell and purchase the same security with an agreement to purchase or sell the same security at a mutually decided future date and price. The transaction results in collateralized borrowing or lending of funds. Presently in India, corporate debt securities, Government Securities, State Government Securities and T-Bills are eligible for Repo/Reverse Repo.
9. “Tri-party repo” means a repo contract where a third entity (apart from the borrower and lender), called a Tri-Party Agent, acts as an intermediary between the two parties to the repo to facilitate, services like collateral selection, payment and settlement, custody, and management during the life of the transaction.
10. Money market instruments permitted by SEBI/RBI, having unexpired maturities upto 1year and shall include CP, CD, T-Bills, Repo, Reverse repo,BRDS, TREPS etc.,