Fixed income investment is part of the portfolio of every investor, whether a beginner or a senior. These are lower-risk deposit options and offer a steady income in the form of fixed interests or dividends. Fixed-income investments are the pillars of the investment portfolio that is well-diversified. Thus, these are necessary for lowering the volatility of the collection of one’s investments. This article discusses details about fixed income investment and its types.
Types
Are you looking for a fixed income source? Then, here is the list of different types of fixed-income investments. You can select the best option according to your preferences.
Certificate of deposit (CDs)
CDs are the safest investment product as a fixed amount of money is required for a specified duration to generate a steady return. These savings accounts require the money to be invested for a fixed amount of time. These are usually considered low-risk investments. With CDs, the biggest advantage is that there is no need to worry about fluctuating interest rates. There is no monthly fees. CDs provide guaranteed returns on investments. These can be purchased from brokerage firms, banks, and credit unions.
Treasury bills or T-bills
These are short-term fixed income securities that mature within one year. T-bills do not pay coupon returns, but investors earn the difference between the purchase price and face value at maturity. They buy the bill at a price lower than the face value.
Treasury notes or T-notes
With the T-notes, the maturity period is between two and ten years. These products are sold in multiples of $100. The principle is repaid at the end of maturity, but semiannual interest payments can be earned until then.
Treasury bonds or T-bonds
T-bonds are similar to T-notes but differ in their maturity time. T-bonds take 20 or 30 years to mature, and like T-notes, they can be purchased in multiples of $100.
Treasury inflation protected securities (TIPS)
TIPS is the best choice if you are looking for protection from inflation. The principal amount is adjusted according to deflation and inflation.
Municipal bonds
Municipal bonds are issued by the government and are similar to treasury bonds. The only difference is that these are issued and supported by the state, county, or municipality in place of the federal government. Municipal bonds also offer tax-free advantages to investors.
Junk bonds
Junk bonds are also known as high-yield bonds. It is issued by the corporates, and there is a greater risk of default. It happens when the agency fails to pay the principal and interest on a debt security or bond.
Corporate bonds
Corporate bonds come in various types, and their prices and interest rates are primarily influenced by the financial stability and creditworthiness of the issuing company. In general, bonds that have higher credit ratings tend to offer lower coupon rates. This is because these bonds are perceived as less risky investments by investors, and thus, the issuer can offer a lower coupon rate to attract investors.
Fixed income investment – Pros
The benefits of fixed-income investments are as follows:
Certain products are supported by FDIC (Federal Deposit Insurance Corporation) and the government
There is a possibility of higher stable returns in comparison to the stocks
They are a steady income stream, and there is a flow of fixed returns
There is also a larger claim to the assets in bankruptcies
Fixed income investment – Cons
The disadvantages of fixed-income investments are:
These products are sensitive and prone to inflationary risk
There is a susceptibility to the interest rate risks
Also has exposure to default and credit risk
Factors to consider when investing
Certain factors should be considered while investing in an account. The following are the things that should be kept in mind while making a choice:
FDIC-insured accounts
Always look for FDIC-insured accounts and get peace of mind for the safety of the investment.
Seeking help from the professional
Consult a financial advisor before investing. It’s important to educate yourself on safe investment resources and apps. The advisor may also even recommend some excellent options.
Diversification
It is always best to have a diversified investment portfolio when it comes to income for retirement and life.
Low-risk and low-return investing
Low risk and low returns may be involved when looking for safe investments.
Diversification and generating a safe and steady income are crucial for a good investment. There are many fixed income investment options, and it’s always best to choose one product after consulting a financial advisor. Always compare all the available options and choose per your specific needs and requirements.