What is Fixed Income Investing?

Definition, Investment Types and Strategies for Fixed Income Mutual Funds

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What does it mean when you see the term fixed income in the world of investing? Although you've likely heard the term before, you might not know quite what it means or how fixed income can be beneficial for you and your portfolio of mutual funds.

Fixed Income Definition (Investing)

Fixed income can refer to an investment strategy or style that is intended to produce relatively fixed or stable income.

Or the term can also refer to investment types within an investment portfolio. From a lifestyle perspective, fixed income can also reflect a person's individual or household income.

Fixed Income Investment Strategy

When building a portfolio of mutual funds, the term fixed income generally refers to the portion of the portfolio that consists of funds that are relatively low in market risk and they pay dividends or interest, typically with bonds and bond mutual funds, to the investor for purposes of generating income. The overall idea for the fixed income investment strategy is to generate stable and predictable returns.

Fixed Income As Retirement Lifestyle

The most common purpose for the fixed income investment strategy is for retirement. This is a time in life where achieving stable and predictable returns is most important. A person in retirement may rely on income sources, such as Social Security, pensions, annuities and/or investment accounts, that produce the same amount of income (or an amount increasing at a small, nominal rate) on a year-to-year basis.

In different words, this person' income does not vary materially over time and they may have very little ability to absorb significant increases in periodic expenses. In this regard, the person's income is "fixed." However our focus here is on how fixed income is related to investing.

Types of Fixed Income Savings and Investments

Since the general fixed income strategy is to generate a reliable source of income, fixed income investment types can include bond mutual funds, money market funds, Certificates of Deposit (CDs) and/or various types of annuities for the fixed income portion of your portfolio.

Inflation and Rising Interest Rates: The Enemies of Fixed Income Investors

When planning for any kind of long-term investment objective, the investor/saver will need to assume at least an average rate of inflation, which has historically averaged around 3.4%. Investors can find it difficult to get yields that outpace inflation without taking significant risk. They can consider bonds for inflationary environments, such as Treasury Inflation-Protected Securities (TIPS) or they may consider bond funds for rising interest rate environments, although these may provide yields below average rates of inflation. Bond investors willing to take some risk may also consider high yield (junk) bond funds.

Investors may also consider buying individual bonds, instead of bond mutual funds, when interest rates are expected to rise. They may try a bond ladder approach, where bonds are periodically purchased as yields rise. In summary, bond prices move in opposite direction of interest rates because of the effect the new rates have on the old bonds. When interest rates are rising, new bond yields are higher and more attractive to investors while the old bonds with lower yields are less attractive, thereby forcing prices lower.

So now when you see or hear the term fixed income, you'll know what it means, especially as it is associated with investing and mutual funds.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.