What is fixed income?
Fixed income refers to any type of investment that pays a predetermined rate of return. Common examples of fixed-income investments include bonds, annuities, and pensions. The key characteristic of fixed-income investments is that they offer stability and predictable cash flow, which can make them an attractive option for investors seeking to preserve capital or generate an income.
The benefits of fixed income
Fixed-income investments can offer a number of advantages, including:
- Predictable cash flow: Fixed-income investments typically make regular interest payments, which can provide a reliable source of income.
- Capital preservation: Fixed-income investments tend to be less volatile than stocks, making them a good option for investors who are risk-averse or looking to preserve capital.
- Diversification: Fixed-income investments can help diversify a portfolio, which can reduce overall risk.
The risks of fixed income
Fixed-income investments are not without risk, however. Some of the risks associated with fixed-income investments include:
- Interest rate risk: When interest rates rise, the value of a fixed-income investment typically falls. This is because investors can get a higher return elsewhere. For this reason, it's important to consider the current interest rate environment when investing in fixed income.
- Inflation risk: Fixed-income investments may not keep pace with inflation, which can erode the purchasing power of your investment.
- Credit risk: This is the risk that the issuer of a bond will default on interest payments or repayment of principal. This risk is typically higher for bonds with lower credit ratings.
Types of fixed income
There are various types of fixed-income investments, including:
- Bonds: Bonds are debt securities that are issued by corporations and governments. Bonds typically have a fixed interest rate and a maturity date, at which point the bondholder will get their principal back.
- Annuities: Annuities are contracts that are issued by insurance companies. Annuities typically offer a guaranteed rate of return and can be used as a source of income in retirement.
- Pensions: Pensions are retirement plans that are offered by employers. Pensions typically offer a guaranteed rate of return and can provide a source of income in retirement.
How to invest in fixed income
There are a few different ways to invest in fixed income, including:
- Individual bonds: Investors can purchase individual bonds directly from the issuer or through a broker. Bonds can be held until maturity or sold prior to maturity.
- Bond funds: Bond funds are mutual funds that invest in a portfolio of bonds. Bond funds offer diversification and can be a good option for investors who don't want to purchase individual bonds.
- Annuities: Annuities typically offer a guaranteed rate of return and can provide a source of income in retirement.
- Pensions: Pensions also typically offer a guaranteed rate of return and can provide a source of income in retirement.