What Is Fixed Income Investing?

Definition & Examples of Fixed Income Investing

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Fixed income investing is an investing strategy that focuses on very low-risk investments that pay out consistent income. Depending on your age and financial goals, the fixed income investment strategy may be ideal for you.

Learn more about fixed income investing, its pros and cons, and if it's right for you and your portfolio.

What Is Fixed Income Investing?

Fixed income investing focuses on investments that pay a return on a fixed schedule. These returns could be dividends or coupon payments. Those who are looking to adopt this method often focus on low-risk investments. These may be bondsbond mutual funds, money market funds, certificates of deposit (CDs), and blue-chip stocks.

How Fixed Income Investing Works

Fixed income investing involves certain goals that make assets like bonds, money markets, and CDs the best options. First, these investments are among the safest. Most people with a fixed income investment strategy want to preserve their capital.

These assets also have reliable payouts on a fixed schedule. You can count on them serving as an extra income source. You know exactly how much you'll be getting and when you'll be getting it. This allows you to avoid dealing with the market's volatility.

Note

It's still important to have diversification among your fixed income investments.

Retirement is the most common reason for using fixed income investing. That's because it is a time in life where stable and predictable returns are very important. A retiree might rely on income sources that produce the same amount of income on a year-to-year basis. They also may prefer those that increase at a low, nominal rate. These could include Social Security, pensions, annuities, or investment accounts,

What Are the Pros and Cons of Fixed Income Investing?

Fixed income investing is a good strategy for those with a focus on capital preservation. But it may not be right for everyone.

Pros
  • Capital preservation

  • Income generation

  • Low-risk

Cons
  • Risk of inflation

  • Interest rates may rise

  • Risk of default

Pros Explained

  • Capital preservation: Capital preservation is about ensuring the money you invest, at the very least, doesn't lose any value. With most investments with a clearly stated return amount and schedule, you don't have to worry about losing your principal. The principal amount may be inaccessible during the term of the investment, but it won't lose any value.
  • Income generation: Fixed income investing provides a reliable additional source of income. With interest rates higher than the majority of standard savings accounts, this is a great way to get more value for your money and let it work for you.
  • Low-risk: Fixed income investing allows people to invest without stressing over stock market risk. Many factors outside of your control affect how a stock performs. The arranged schedule of fixed income investments makes most investments immune to this.

Cons Explained

  • Risk of inflation: Assume an average rate of inflation—around 3.24%—when planning for any long-term investment objective. Fixed income investments often have lower returns. You may find it difficult to get yields that outpace inflation without taking some risk.
  • Interest rates may rise: Bond prices move in the opposite direction of interest rates because of the effect the new rates have on old bonds. When interest rates are rising, new bond yields are higher and more attractive to investors, while old bonds with lower yields are less attractive, thereby forcing prices lower.
  • Risk of default: Fixed income investments are generally some of the safest offered. But no investment is 100% risk-free. Bonds are always at risk of default, especially those from corporations. It can happen if the company faces financial problems and can't repay its debts.

Key Takeaways

  • Fixed income investing involves investing in very low-risk assets with regular payouts.
  • Retirees are the most common adopters of the fixed income investment method.
  • One of the biggest downsides is that the returns may not outpace inflation.
  • Fixed income investing is a good strategy for those concerned with capital preservation.