Bond players are universally known as bond investors which come in a diversified role. In a simple term borrowing loans by corporate or government by the way of multiple investors with assurance toward fixed returns. The borrower / Issuer pledge to pay a fixed amount of interest (termed as coupon rate) yearly until maturity date. At maturity, the borrower / Issuer pledge to return the principal amount (termed as face value or par value) along with returns to the bond investors.
Let us understand by taking single chapter about fixed income saving bond funds, bond market in our next tutorial session.
Let us take an “example of fixed income securities” to understand further:
Example of Fixed Deposit Income (FD):
Let us calculate the retirement and financial planning with few simple assumptions on Fix income deposits issued by Banks:
You intend to invest Rs.1,30,000/- (approx. around $2,000) year on year in the fixed income scheme provided by your bank.
Your net capital re-evaluated every year while include your initial capital per year + investment returns per year + Rs.1,30,000/- per year as a plan of systemic investment.
Going by these assumptions, here is how the cash balance will look like in 20 years as per Table.
No. of Years
Fixed Deposit Per Year
Re-Investment Capital Per Year
8% Return on Investment
Re-Investment Capital Valuation
1
1,30,000
1,25,000
10,400
1,40,400
2
1,30,000
2,70,400
21,632
2,92,032
3
1,30,000
4,22,032
33,763
4,55,795
4
1,30,000
5,85,795
46,864
6,32,658
5
1,30,000
7,62,658
61,013
8,23,671
6
1,30,000
9,53,671
76,294
10,29,964
7
1,30,000
11,59,964
92,797
12,52,762
8
1,30,000
13,82,762
1,10,621
14,93,383
9
1,30,000
16,23,383
1,29,871
17,53,253
10
1,30,000
18,83,253
1,50,660
20,33,913
11
1,30,000
21,63,913
1,73,113
23,37,026
12
1,30,000
24,67,026
1,97,362
26,64,389
13
1,30,000
27,94,389
2,23,551
30,17,940
14
1,30,000
31,47,940
2,51,835
33,99,775
15
1,30,000
35,29,775
2,82,382
38,12,157
16
1,30,000
39,42,157
3,15,373
42,57,529
17
1,30,000
43,87,529
3,51,002
47,38,532
18
1,30,000
48,68,532
3,89,483
52,58,014
19
1,30,000
53,88,014
4,31,041
58,19,055
20
1,30,000
59,49,055
4,75,924
64,24,980
Total Cash Balance in hand at the time of Retirement:
64,24,980
Above calculation results are quite disgusting:
After 20 years you have accumulated around Rs.64,24,980/- (approx. around $98,845).
Considering your expenses is fixed after retirement and expenses will continue to grow at 8%. It’s an adequate amount for 3 years post retirement life. But after 3 year onwards you will be into hell situation if you haven’t plan anything else for the retirement.
Securities which have limited or minimal risk to the principle with the fixed returns paid on the investment. These returns can be classified by quarterly, half-yearly or yearly returns on the principle investment and the capital amount is returned on the maturity with the returns to the fixed income investors. Normally you can expect returns between 6 percent to 10 percent in fixed income funds. Investors with these kinds of investments are mainly classed as “Restricted risk with limited return investors”.
“Fixed income investments are highly suitable for the minimal risk taker investors”. Risk of losing capital is calculated toward inflation rate. For example: If your high yield fix income stocks / bonds assure you for 8 percent returns whereas inflation possibly rises to 9 percent for few years that means you are losing percent per annum when inflation is more than your returns and you are not making money when inflation is equal to your investment returns for those years.
