One of the low-risk investment strategies that offer a steady income is fixed income investing, which can be ideal depending on your age and goals.
What is fixed income investment?
One of the low-risk investment strategies that offer a steady income is fixed income investing, which can be ideal depending on your age and goals. Fixed income investing focuses on investments that provide returns, which can be dividends or coupon payments, on a fixed schedule. Those looking to adopt this approach often focus on low-risk investments such as money market funds, mutual funds, blue-chip stocks, bond markets, certificates of deposit (CDs), and bonds.
How does fixed income investment work?
Assets such as bonds, money markets, and CDs are the best choice for fixed income investing because fixed income investing has specific purposes. First of all, these investments are among the securest. Most individuals who have a fixed income investing method want to save money. Also, in a fixed schedule, these assets have trustworthy payouts. One of the most common reasons for using a fixed income investment is retirement. In this period of people's lives, stable and predictable returns are very important and necessary. A retiree may depend on sources of income that generate the same income year after year. They may also like those with low nominal rates increasing, such as pensions, social security, and annuals, or investment accounts.
Benefits of fixed income investment
Diversification from stock market risk
Fixed income is less risky than stocks. This is because fixed-income assets are less susceptible to macroeconomic risks, such as recessions and geopolitical occasions. You probably have a substantial amount of stock in your portfolio to increase your investment overtime to save for retirement or other long-term purposes. However, by devoting part of your portfolio to fixed-income investments, you can help offset losses from stock market volatility.
Monetization
You can create a stable source of income for yourself by using a fixed-income investment. Investors acquire a fixed portion of income at periodic intervals in the form of coupon payments on their bond assets. In many municipal bonds, income is tax-exempt.
Preservation of capital
Preservation of capital indicates preserving the absolute value of your investment through assets that have a stated purpose of returning the original. Retirement investors may count on their investments to generate income. These assets can be a good choice for investors who have less time to compensate for losses because fixed income usually carries less risk. Yet, inflation can cause your investment to lose value over time.
Total return
Some fixed-income assets present the ability to cause pleasing returns. By taking credit risk or higher interest rate risk, investors can look for higher returns.
Risks of fixed income investment
Inflation risk
For bond investors, one of the major sources of risk is inflation. A fixed amount of income at regular intervals is provided by bonds. However, if the inflation rate exceeds this fixed amount of income, the investor loses his purchasing ability.
Liquidity risk
Liquidity risk is the possibility that an investor may like to sell a fixed-income asset but cannot find a buyer.
Interest rate risk
As interest rates rise, bond prices fall, which means that the bonds you maintain lose their value. In fact, the main cause of price fluctuations in bond markets is interest rate movements.
Credit risk
There are both interest rates and credit risks when investing in corporate bonds. Credit risk is the probability that an issuer will default on its debt responsibilities. In this case, the full value of the original investment may not return to the investor.
The most important things to know before investing in fixed income mutual funds
Can a mutual fund lose money?
When we have already invested in a bond, it means that we miss the chance to bring this money to discover other investments that may have better returns.
What is a credit rating?
Credit rating is the credit rating of debt securities by "credit rating agencies" that have been authorized by the Securities and Exchange Commission (SEC). A credit rating level is a tool that estimates the risk of debt securities default. The higher the credit rating of the bonds, the lower the risk of default. Note that the credit rating is divided into two groups, namely the investment grade or investment group (AAA to BBB-) and the credit rating or speculative group (BB + - Down to D). Thus, if you want to invest in fixed income funds, pay attention to the credit rating of the debt securities in which the fund has invested.
Where is the return on the mutual fund?
Investors, whether they have invested in private company bonds or government bonds, earn a certain amount of interest (coupon) as well as a profit from the capital gain if sold at a price higher than the purchase price. However, if it is sold at a price lower than the purchase price, it loses money in this area, because of the possibility to lose from investing in fixed income funds.
What is the benchmark of a fixed-income fund?
The government bond index is the primary indicator for measuring the movement of the bond market in order to compare the rate of return with other assets and is used as a standard to measure bond performance. Also, the government bond index is used as a tool to reflect market interest rates, which means that if interest rates fall, debt securities prices rise, and the index rises. In other words, if the market interest rate increases, the price of debt securities will decrease, and as a result, the index will decrease.
Who is suitable for investing in fixed income funds?
This type of investment is suitable for people who do not like a lot of risks and do not hope for high returns. Also, fixed-income funds are appropriate for investors who miss out on buying government bonds or bonds of private corporations that tend to contest for a share during the offering time.
