Sign for CD rates
Source: Getty

Banks offer CDs as a type of fixed income investment.

How to Invest in Fixed Income and Whether You Should

By

Aug. 11 2021, Published 2:47 p.m. ET

Some investors need a relatively conservative investment strategy and less risk than with stock market investments. For those with that goal in mind, fixed income might be a good fit.

Article continues below advertisement

Fixed income includes assets and securities that provide the investor with a steady stream of income. With fixed income, the investor generally receives a set amount back at regular intervals. The payments include the principal (initial investment) plus interest.

Types of fixed-income investments

The most common types of fixed-income investments are corporate and government bonds. CDs pay a set amount of interest on your initial investment at maturity (usually less than five years). Money market funds also fit into this category.

Article continues below advertisement
investing in fixed income
Source: Unsplash

Other fixed income types to consider are Treasury bills, Treasury notes, Treasury bonds, TIPS (Treasury Inflation-Protected Securities), municipal bonds, and junk bonds.

Article continues below advertisement

You can invest in fixed income by buying single bonds, but many investors prefer to use a fixed income ETF or a bond mutual fund. A bond ETF trades on major stock indices like the NYSE, which enables you to gain exposure to bonds within the stock market. A bond mutual fund only invests in bonds and can be more efficient for portfolio-building than investing in single bonds.

Fixed-income laddering strategy

A popular strategy for fixed income is called laddering. You invest in a series of short-term bonds that will mature at different points in time. As each one matures, you can reinvest in another short-term bond, which extends the ladder. For example, CDs work well with laddering.

Article continues below advertisement

Pros of fixed income

One of the main pros of investing in fixed-income securities is that it can provide you with a steady income stream. You receive a set amount at regular intervals, paid in coupon payments from bond holdings.

Another pro is that fixed income is good for investors who are conservative. If you want to avoid taking too much risk with your investments, fixed income is one way to ensure that you don’t lose your initial investment and you will still receive interest payments as well.

Article continues below advertisement

You can achieve some diversification by incorporating both stock investments and fixed-income investments in your portfolio. During down periods for the stock market, bonds tend to still perform well.

fixed income risks
Source: istock
Article continues below advertisement

Risks of fixed income

One risk taken on by fixed-income investors is that of interest rates. As interest rates rise, bond prices usually fall, which reduces your investment’s value.

Meanwhile, inflation is another downside of fixed-income investing. It decreases the value of bonds and other fixed-income assets. Inflation means that even though the initial dollar amount of your investment is safe, that dollar’s buying power decreases.

Article continues below advertisement

In the case of corporate bonds, investors might yield higher returns, but also assume greater risks. If companies don’t perform well in the future, that increases the risk level to bondholders. You can research companies' credit risk via Standard & Poor’s or Moody’s, but that doesn’t guarantee that you will find a perfect investment.

If you want to sell a fixed-income asset, there's liquidity risk or the chance that there won’t be a buyer available.

Advertisement

More From Market Realist

    • CONNECT with Market Realist
    • Link to Facebook
    • Link to Twitter
    • Link to Instagram
    • Link to Email Subscribe
    Market Realist Logo
    Do Not Sell My Personal Information

    © Copyright 2021 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.