Fixed Income Investment Strategies

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December 6, 2022

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Fixed incomes are investments that pay fixed interest until the maturity date. Investors get the principal amount after maturity. Fixed incomes are safe securities and can be excellent for long-term investment. A fixed-income investment strategy can give investors a fixed amount over a long period. 

Apart from government bonds and corporate funds, there are numerous fixed-income mutual funds and exchange-traded funds (ETFs). Additionally, if the company you invested in goes bankrupt, the fixed-income investors get paid before stockholders. 

This post teaches different fixed-income investing strategies, their advantages, and the risks associated with these investments. Let's dig deeper! 

Advantages of Fixed Income Investments 

1. Portfolio Diversification 

Fixed-income investments are less sensitive to geopolitical events, economic downturns, and volatility. Stocks are riskier than these assets. If you invest in stocks with higher risks, you can balance the risk by investing in fixed-income bonds. 

These can be long-term investments for retirement or similar financial goals. You can offset losses when your stock doesn't yield profits during the market swings. 

2. Income Generation 

With smart fixed-income investments, you can start getting a steady pay check every month or year, depending on the bond's policy. You can also invest it in stocks or similar assets. 

3. Capital Preservation 

Capital preservation is safeguarding your assets' net worth with a decided principal return goal. Simply put, investors nearing retirement can depend on these assets to generate income. With fixed-income bonds, an individual can get more benefits without risks. So, it's a safer way to protect your net worth after a period. 

4. Increase in Total Return 

Some government bonds offer doubled amounts after maturity along with interest. These attractive returns are one of the significant advantages of having a fixed-income investment strategy. 

5. Less-Volatility 

Because the interest rate and payments are fixed, these are stable assets. Stock values may fluctuate, but a fixed-income bond remains steady even during inflation. 

6. Guarantee 

Treasury bonds or saving bonds are money you lend to the government. So, these offer guaranteed returns after maturity. 

Risks Associated with Fixed-Incomes Investments

1. Credit Risk 

Corporate bonds are money that you lend to the company. So, if that company goes into loss, you may not get the principal value and interest. However, government bonds are safer and have fewer credit risks. You must read the policies and default credit rules before investing in corporate bonds. The company's history, workflow, success, management, and similar factors play a significant role in credit ratings. Keeping these in mind will help you invest well. 

2. Interest Rate Risk 

A bond's price decreases with an increasing interest rate. So, your bond may lose value if the interest rate keeps getting high due to volatility. 

3. Liquidity Risk

Fixed-income bonds may yield good returns, but you won't be able to sell them and convert them into cash immediately. You should keep cash or other easy cash equivalents for emergencies.  

4. Inflation Risk 

Fixed-income investments provide fixed amounts over at intervals. However, in inflations, the bond's value may decrease from when you purchased it. In short, your money may decrease in value over time. 

Types of Fixed-Income Assets 

By understanding different fixed-income asset options, you can choose the suitable ones and start investing in them. 

1. Treasury Bonds or T-Bonds 

Treasury bonds are debt issued by the government to finance operations. It's like you lend money to the government for 20 to 30 years and they give you interest and principal back after maturity. You have to pay half price of the face value while investing. 

For example, if you want to invest in a bond of 200$, you have to pay 100$ while investing. These fixed-income investments returns double after you let the bond mature. You can purchase these in multiples of $100 from their official website - 

2. Treasury Notes or T-Notes 

Treasury notes are similar to treasury bonds, except they mature within two to ten years. Investors get the semiannual interest paid and the principal value after maturity. These are short-term investments and are sold at a government auction. 

3. Treasury Bills or T-Bill 

These investments are shorter than T-notes and mature in one year or less. These short-term investments do not pay interest but are sold at half or lower value, so you get an increased amount within a year. So, you pay less and get more in less time. 

4. Treasury Inflation-Protected Securities (TIPS)

As the name suggests, these fixed-income investments secure you from inflation and adjust the interest value and principal amount with inflation and deflation. It reduced the risk of investing in fixed-income bonds. The maturity period can be 5, 10, or 30 years. Its minimum purchase amount is 100$, and you buy them from the U.S. Treasury's TreasuryDirect website.

 5. Municipal Bonds 

These are similar to treasury bonds except these are issued by a municipality, state, control, or similar foundation instead of the government. With this money, the foundation spends on local expenditures and development projects. They may have tax-free advantages too. 

6. Corporate Bonds 

Instead of a government body, these bonds are issued by a company. The interest rates and maturity date depend on the company's policies and financial state. By investing in these bonds, you lend money to a company, and they pay you interest. These are riskier than U.S. treasury bonds.  

7. Junk Bonds or High-Yield Bonds 

These are riskier than any bonds mentioned above. These are issued by companies with lower credit ratings. They pay the highest interest rate, but if the company defaults, you may not get the interest. However, a bondholder received the principal amount before stockholders in such cases. 

The Bottom Line 

Although fixed-income bonds may yield a profit over a long period, they offer lower interest rates, and you may gain more from stocks and other investment assets. Therefore, these are crucial to diversifying your portfolio and having a secured income after retirement. While investing in fixed-income assets, you can consider real estate investments, stocks, shares, and similar options. Learn details about these assets by joining the Compound Banc community today! 

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