Fixed income investments are many investors’ bread and butter. More secure and stable than buying stocks (also known as “equity”), making a fixed income investment means buying a bond, which a company issues to raise debt.
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You make your profit through interest payments, which the company will pay out to you over a predetermined number of years. Then, when the bond matures, the principal amount will be returned.
Choosing the right fixed-income investment
If you think that fixed-income investments might be suitable for you, then it’s important to ensure you select ones that are well-suited to your situation and long-term financial goals. Different bonds will have different payoff periods and interest rates attached, so assess your needs before making a start.
You should also aim to build a portfolio of bonds, rather than rely on the payoff from one. While fixed-income investments are certainly more stable than stocks (more on this below), they are still at the mercy of things like interest rates, inflation, and the issuing company defaulting.
Having a diverse portfolio can help to mitigate any damage done if one company takes a nosedive. However, they can be difficult to keep track of. Consider contacting an asset management firm, which will have the experience and know-how to monitor the progress of your portfolio.
4 benefits of fixed-income investments
Guaranteed income
One of the main reasons fixed-income investments are so popular is because they offer a certainty that you just don’t get with stocks. From the outset, you know that you’ll receive regular interest payments at a set rate and over a set period of time. These payments are regular, too, often being handed over either once or twice every year.
By comparison, those who choose to invest in stocks get no such guarantee of a pay-out. If, for example, a company decides to reinvest its profits, it can do so, which means the stockholder won’t see a return on their investment. So, for investors that want a definite, regular income, buying bonds is a great way to go.
Capital preservation
Investors can feel confident that their investment will be safe and their money returned with fixed-income investments. For one thing, there will be a contractual agreement between the bond issuer and bondholder, which sets out the repayment schedule. This includes when interest payments will be made and the original principal amount returned.
For another, investors don’t go in blind. Before they spend any money, they can check the credit rating of the bond they are interested in, which will be assigned by an independent body known as a credit rating agency. A good credit rating suggests that an issuer is highly unlikely to default on their payments, while a poor one indicates the opposite.
Stability
In addition to the promise of a guaranteed income, bonds can also offer investors a degree of stability. Again, all investments carry risk, and fixed income investments are no exception. But, while interest rates and inflation can cause price fluctuations in bonds, they are nowhere near as volatile as stocks. As such, bond prices are far less likely to skyrocket or plummet at a moment’s notice.
Security
Perhaps the biggest draw investors have to fixed income investments is their security. When buying bonds, there is a legal framework in place, which helps to ensure that a company pays you your money as and when it has been promised. Failure to do so constitutes a “default” on the payment, which means that it would be more expensive for the company to borrow money in the future from you or anyone else.
Bondholders are also more of a priority than stockholders, which is invaluable when a firm ends up going bankrupt. You see, as a bondholder, you will receive whatever money can be retrieved if a company goes bust, while they have no such obligation to stockholders. Those who invest in shares are more likely to end up with nothing.
Essentially, bonds carry far less risk than stocks, which is why so many investors feel more secure investing in them.
