Your Fixed Income Investment: Passive or Active, Safety or Income



Fixed income investing

Investing in fixed income instruments is much more about strategy than any other factor. You need to know where you want to be invested when you’re first putting up money. The same goes for portfolio realignment. Unlike equities, investing in fixed income is not just about whether you should stay or wind up.

Investment products such as mutual funds and ETFs can make your journey through the fixed income forest easier. Mutual funds are mostly actively managed, while ETFs are mostly passively managed, that is, they can track indexes with no interference by the fund manager. Without these products, it’ll become very difficult to invest and to decide when to sell, especially in corporate bonds (C) (GE) (MSFT).

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In the graph above, we can see the returns of different mutual funds and ETFs. The comparison for short-term funds is between the first two (OPGVX) (SHY), OPGVX being a mutual fund and SHY being an ETF. The same goes for the next six funds represented (AMUSX) (IEF) (VUSTX) (TLT) (OPIGX) (LQD), all of which invest in investment-grade bonds, and the last two represented (WHIAX) (HYG), which invest in high yield bonds.

The choice of funds was made completely at random, so the results are indicative, not exhaustive. This was done to keep the picture very general.

Passive versus active

As can be seen in the chart, ETFs have mostly outperformed mutual funds. Though the analysis is not exhaustive, it does show that active fund managers are not yet certain about which part of the Market they want to invest in.

Investors should know, though, that fund managers may have specific time periods in mind in which funds’ positioning will start producing great results. This is why time horizons are so important in fixed income investing.

Safety versus income

Whether you believe in passive or active investing, one thing is for certain: During uncertain times, the appeal of fixed income products rises, even if interest rates are on the rise. Depending on where you want to be in the current Market, your focus should be on price movement or income generation. With a certain time horizon in mind, you’ll have the tools to help you ride safely out of today’s volatile times.

Inflation is closely associated with fixed income investing with longer maturity. Let’s look further into this in the next article.


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