What is a fixed income? | Overview & Investment Options

Fixed income securities have minimal risk, so they're a good pick for first-time investors. Learn about the available options and how to start investing.

3/4/2021 6:22:00 PM

Via InquirerUSA When you read “What is a fixed income?” you probably thought we were referring to employment. However, we were talking about fixed-income investments.

Fixed income securities have minimal risk, so they're a good pick for first-time investors. Learn about the available options and how to start investing.

AnnuitiesThese options have their perks and quirks, so none of them are perfect. Match the viable choices with your investment strategy.Certificates of deposit (CD)These allow you to save money at a fixed interest rate for a certain period. They’re also known as time deposits.

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You start by purchasing these certificates of deposit. Then, you must leave your money until the maturity date. Before the deadline, you receive payment typically twice a year.Banks and credit unions provide regular CDs. On the other hand, brokerage firms grant their options.

Recently, a new type calledhas emerged. However, most investors frown upon them and prefer the classic certificate of deposit instead.BondsPurchasing bonds means lending to your government, municipality, or corporation. Hence, the bond market options can be classified according to their issuers. headtopics.com

As the name suggests, private businesses issue corporate bonds. Their interest rates and prices depend on a company’s creditworthiness and financial stability.They also issue junk bonds or high-yield bonds. However, they’re also high-risk since its issuer might not be able to pay principal nor interest.

Local governments issue municipal bonds. Meanwhile, the US Department of the Treasury issues government bonds like treasury bills, treasury bonds, and t-notes.Bond fundsIt’s a type of investment company that invests mainly in bonds and other fixed income securities.

Bond fundsalso refer to mutual funds, bond ETFs, and unit investment trusts (UIT).Some people believe that bond funds pose no risk whatsoever. Contrary to popular belief, investors may lose money in bond funds due to multiple factors.What’s more, there are ultra-short funds, investments for debt securities with too short maturities. Investors should watch out for the higher risk compared to other investments, though.

Money market fundsSimilar to bond funds, these invest in short-term debt securities. The brief maturity may limit uncertainty and risk so that investors may gain quick yet meager returns.Just like how bonds mature,money market fundsalso pay dividends periodically. Moreover, they’re usually liquid, meaning you may receive funds after a few business days. headtopics.com

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Unfortunately, market turmoil may cause them to become illiquid. Worse, you may lose your principal. The government doesn’t back them, so expect handling market losses alone.AnnuitiesThese fixed income products are contracts between investors and insurance companies. They ensure income periodically for the rest of your life!

You may choose fixed-rate annuities that guarantee interest rates of around 5%. On the other hand, variable-rate annuities pay based on how your option performs.However, their interest payments are far smaller compared to other securities. Worse, the scant returns are offset further by numerous fees. Some investors might find them worthwhile, though.

Benefits of fixed incomeAll investments have their potential benefits and risks. The key to successful investing is finding out which ones best suit your strategy.Most investors swear by the well-rounded portfolios. They don’t limit themselves to one kind of investment. However, your portfolio mix will entirely depend on you.

As a result, they often include fixed income securities along with their stocks. Their benefits go beyond the safe and steady gains:1.Diversification– Most people invest in the stock market. However, it’s subject to numerous factors such as business performance and economic downturns. Fixed income investments allow them to cushion potential stock market losses. headtopics.com

2.Capital preservation– Retirees may replace the volatility of stocks for the assurance of fixed income securities. However, be mindful of possible inflation risk.3. Read more: Inquirer »

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