What Is Fixed Income Investing?
Definition, Investment Types, and Strategies for Fixed Income Mutual Funds
Fixed income can refer to an investment strategy that's intended to provide an investor with relatively stable income in the form of interest or dividends, but it can also refer to investment types within an investment portfolio, such as bonds and bond mutual funds.
Fixed income can also refer to a person's individual or household income, which is fixed and generally unchanging, such as in retirement. All three concepts can depend on each other.
Types of Fixed Income Investments
The term fixed income generally refers to the portion of a portfolio that consists of funds that are relatively low in market risk. They pay dividends or interest to the investor for purposes of generating income, and they do so on a regular basis, such as once a year, twice a year, or sometimes monthly.
For example, bonds pay a stated interest rate in the form of periodic payments over a fixed term. The overall idea for the fixed income investment strategy is to generate stable and predictable returns.
Fixed income investment types include money market funds, certificates of deposit (CDs), and various types of annuities for the fixed income portion of your portfolio.
Fixed income investments can also include bills, bonds, and notes issued by the U.S. Treasury. States and municipalities offer municipal bonds that serve the same purpose.
Fixed Income as a Retirement Lifestyle
Retirement is the most common reason for using a fixed income investment strategy because this is a time in life where achieving stable and predictable returns is most important.
A retiree might rely on income sources, such as Social Security, pensions, annuities, or investment accounts, that produce the same amount of income on a year-to-year basis, or an amount that increases at a small, nominal rate annually. This individual's income doesn't vary materially over time, and she might have very little ability to absorb significant increases in periodic expenses. Her income is "fixed."
The Enemies of Fixed Income Investors
An investor should assume at least an average rate of inflation when planning for any kind of long-term investment objective. Inflation has historically averaged around 3.4 percent.
Investors can find it difficult to get yields that outpace inflation without taking some risk. They can consider bonds for inflationary environments, such as Treasury Inflation-Protected Securities (TIPS), or they might consider bond funds for rising interest rate environments. Bond funds can provide yields below average rates of inflation, however. Bond investors willing to take some risk might also consider high yield (junk) bond funds.
Investors might move toward buying individual bonds instead of bond mutual funds when interest rates are expected to rise. They might try a bond ladder approach, where bonds are purchased periodically as yields 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.
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.