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Definition and Example of 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 bonds, bond 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. 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 additional income source. You know exactly how much you’ll be getting and when you’ll be getting it, allowing you to avoid dealing with the market’s volatility. Retirement is the most common reason for using fixed income investing. It’s 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 may also prefer those that increase at a low, nominal rate, such as pensions, annuities, or investment accounts,
Pros and Cons of Fixed Income Investing
Fixed income investing can be a good strategy for those with a focus on capital preservation, but it might not be right for everyone.
Pros Explained
Capital preservation: Capital preservation is about ensuring that the money you invest doesn’t lose any value. You don’t have to worry about losing your principal with most investments that have a clearly stated return amount and schedule. 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 your control can affect how a stock performs. The arranged schedule of fixed income investments makes most of them immune to this issue.
Cons Explained
Risk of inflation: Assume an average rate of inflation of about 3.24% when you’re 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. New bond yields are higher and more attractive to investors when interest rates are rising. 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 some risk of default, especially those from corporations. It can happen if a company faces financial problems and can’t repay its debts.
