Fixed Income Investment

What is Fixed Income Investment?

Fixed income investment is focused on the preservation of capital and generating income. These include investing in government and corporate bonds. Bonds can offer a steady stream of income with lower volatility than stocks. Usually these securities pay investors a fixed or variable coupon until the maturity date. Upon maturity, the principal amount is returned to the investor. Fixed incomes investments can be used by investors to diversify their portfolio given these are not as risky as equities. Because the returns in this investment are generally reliable, it is particularly popular among people who are looking for a steady stream of income in retirement.

How Does a Bond work?

Income based funds usually generate returns through coupons and dividends received from the securities held by them. 

A Bond is basically a loan that an investor gives to a government or corporation. Until the maturity date, the borrower pays the investor a fixed amount of interest known as coupons. Upon reaching the maturity date, the borrower repays the principle amount to the investor. 

Zero-coupon bonds don’t pay regular income, but are issued at a discount. On maturity the bonds are redeemed at face value.

 

Benefits of Fixed Income Investment

Diversification from stock market risk 

Fixed income is understood to carry lower risk than stocks. They are less prone to macroeconomic risks like economic downturns and geopolitical events.  By allotting a portion of your portfolio to fixed income investments, you can possibly help offset losses when stock markets sway. 

Capital Preservation 

Capital preservation is protecting the absolute value of your investment via assets that have an objective of return of principal. Investors who are closer to retirement can depend on their investments to provide income. Because fixed income carries less risk, these assets can be a good choice for investors who have less time to reimburse losses. 

Generation of Income

Fixed income investments help you generate a steady source of income. Investors receive a fixed amount of income at regular intervals in the form of coupon payments. 

Total Return 

Few fixed income assets provide the potential to generate attractive returns and the investors can seek higher returns by assuming interest rate risk or assuming credit risk. 

Bottom Line

Fixed income securities generate a steady stream of cash flows for the investors and the amount and the time of these cash flows are known well in advance thus helping the investors to plan their finances accordingly. In case of unforeseen events like bankruptcies the secured bonds have higher claims. Apart from this, fixed income investments are usually not as volatile as equities.