“Guide To Fixed Income Investments”
What is fixed income?
Fixed income is a highly recommended method for investment or budgeting practice, where investors receive an annual percentage return or income at regular intervals. Fixed income funds, commonly known as bond funds, are simple mutual funds that hold fixed income securities such as municipal bonds, corporate bonds, and US treasuries. Retirees are often the main investors in fixed income funds, as they seek a stable income from their investments. These funds have gained popularity due to their reliable returns.
Advantages of fixed income funds
1. Rationality of the principle: Investing in fixed income funds offers the advantage of having peace of mind with a stable principal amount. The fixed portfolio of investments and capital conservation ensures that the principal amount is repaid in full on a fixed date. Unlike certain government bonds, fixed income funds hold high value and minimize the risk of not being able to repay the full amount upon maturity. This reduces the risk faced by investors regarding repayment of funds.
2. Steady income stream: In addition to the potential for increased capital, fixed income funds provide investors with a steady inflow of income generated from their investments. Investors receive regular cash inflows in the form of dividends and interest from stocks or CDs, as determined by the bonds. These payments continue until the issuing financial institution becomes insolvent. While there may be default risks associated with corporate bonds with lower credit agency ratings, this is less common with federal government bonds.
3. Increased claim to assets: Fixed income investors benefit from both equity and debt investments issued by financial institutions. Bondholders who have a bond with a bank or credit union enjoy priority over common shareholders, while preferred shareholders of the same institution may face indebtedness or liquidation. During the liquidation of assets, bondholders have the highest chance of having their principal investment repaid.
Types of safe fixed-income investments
1. Cash and money market: Allocating assets to cash and money market accounts is a safe and prudent option for any investor, as these accounts can be insured up to a limit of $250,000. Savings, checking, and money market accounts do not carry market and liquidity risks. However, they are not immune to inflation risk.
2. Certificate of deposit: A certificate of deposit (CD) is a secure time deposit product offered by banks, savings institutions, and credit unions. Investing in CDs is a safe option for investors seeking principal protection and regular income. CDs have varying maturity periods, ranging from six months to 10 years. The interest rate received depends on the chosen term and is typically higher than rates offered by other banks. While CDs are not subject to market risks, inflation and indebtedness could still pose challenges.
3. Individual bonds: Fixed income investments can take the form of individual bonds, including corporate, revenue, and municipal offerings. Investing in individual bonds allows investors to lend their assets to the bond issuer in exchange for an announced interest rate paid over time. Individual bonds carry higher market risks, as companies offering debt securities may face bankruptcy, resulting in bond failures.
4. Municipal bond: Municipal bonds are debt securities issued by state governments to cover capital expenditures such as highway construction, bridges, or educational institutions. These bonds are safer than corporate bonds but still carry some risks. Municipal bonds attract investors who pay significant income taxes, as they are exempt from federal and local taxes.
5. Bond funds: Investing in bond funds can be more effective than purchasing individual securities. Bond mutual funds pool together investors' money, which is then managed by a specialist for optimal investment opportunities. Some bond funds incorporate a broad market approach, investing in short and long-term bonds from various financial institutions. Other funds focus on specific sectors of the bond market, such as corporate high yield or treasury funds.
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