What is fixed income investing?
Secure Wealth Management with Fixed Income Investing
Successful wealth management demands investment diversity and income continuity. Fixed income investing plays a key role in many portfolios, with this broad term describing any security that pays fixed interest or dividend payments. Fixed income investing is a conservative strategy focused on generating income while preserving capital until a designated maturity date. Examples of fixed income instruments include government and corporate bonds, bond mutual funds, money market funds, certificates of deposit (CDs), and low-risk blue-chip stocks.
If you’re looking for consistent income or planning for retirement, fixed income techniques can prove highly useful. Let’s take a look at how these investments function and analyze the advantages and disadvantages of fixed income products.
How fixed income investing works
Fixed income investing is a safe and predictable strategy where payouts are scheduled. Unlike stocks and other riskier investments, you know how much you’ll be getting and when, which helps you avoid underlying market volatility. Fixed income instruments have a simple function that is repeatable and known ahead of time.
As an investor, you lend your money in exchange for a set interest rate return. At the maturity date, you are repaid the original amount invested. For example, you may buy a five-year bond for $1,000 and receive 5% per year until the maturity date. The interest payments you receive are called coupon payments, with $50 earned per year and $250 earned over five years. At the end of five years, you are repaid the $1,000 principal. Along with annual payments, some fixed income products pay out monthly, quarterly, or semiannually.
The benefits of fixed income investing
Fixed income instruments offer a range of advantages compared to other investments. Depending on the product in question and your financial goals, the following benefits are possible.
- Capital preservation — Fixed income products are very low-risk. You can protect the absolute value of your investment through the return of the principal. However, it’s important to be mindful of interest rates and inflation, which can cause your investment to lose value over time.
- Income generation — Fixed investments generate a reliable and regular source of income over time. You receive coupon payments at steady intervals, which can be used to improve budgeting and fund retirement. Municipal bonds and other instruments are even exempt from taxes.
- Diversification — Fixed income products have a lower risk profile than many other instruments. They are less sensitive to macroeconomic risks, making them an ideal tool for diversification. If you have stocks, adding fixed income investments to your portfolio can help to offset losses.
The risks of fixed income investing
Despite the financial advantages and low-risk profile of fixed income investing, there are also some disadvantages. Inflation can be a concern, with lower returns possibly outpaced in an inflationary environment. Rising interest rates can also limit the positive impact of fixed instruments, as bonds lose value whenever rates rise. There are also credit and liquidity risks associated with fixed income products. For example, defaults are possible and loans can be hard to sell in non-competitive market conditions.
If you want to diversify your portfolio or plan for your retirement, fixed income products can be a great solution. At Delta Capital Management, we offer expertise in fixed products and other wealth management solutions. If you want to generate a reliable source of income with minimal risk and maximum opportunity, please contact our team today.