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Fixed Income Investment

Fixed income investment is any form of investment that offers a fixed return in timely intervals. They guarantee stability and are moderately risky. A sound investment plan will grow despite fluctuating market conditions. 

Cash deposits, Government bonds and asset-based securities are popular fixed income investment instruments. The government issues government bonds in national currencies and sovereign bonds in foreign currencies whilst the local government authorities issue municipal bonds. Corporate bonds, bank loans or preferred stocks are fixed income investment instruments. 

Research, identify the fixed income investment opportunities, monitor risks and understand the entire process clearly. These steps will ensure that you have made a safe and profitable fixed income investment. In today’s scenario, a mixed portfolio of stocks and bonds will generate higher profits and spread the risks involved. 

Fixed Income Investment Instruments

Cash Deposits are loans offered to banks at a fixed rate of interest for a specified time period. These are safest fixed income investments and offer a regular income. 

Bonds are an excellent option for long-term investors aiming for a stable return. They are less risky as they are lesser volatile in the stock market. They require a high amount of investment for a diversified portfolio. There is an option of fixed income funds for smaller investors to maintain small amounts of investment. Ensure credit ratings are high and try not to sell the bonds at higher interest rates as the par value of the bond decreases.

  • Corporate Bonds: When you buy stocks, you purchase ownership of the company. Whereas when you buy a corporate bond, you are in fact lending the company ‘money’ and therefore bonds are in some way, debts. The amount you pay for a bond is the par value and bonds pay a fixed amount of interest for specified time duration. The interest is nothing but the coupon rate and since it is fixed, the bonds are fixed income securities. Ensure that the company has a good credit rating otherwise you may have to sell of the bonds at lower than the par value at which you purchased. Interest rates that are prevailing in the market also have a strong impact on the value of these bonds. 

  • Government Bonds: This is the safest fixed income security as the faith and credit of the UK Government add value and minimize the risk involved. 

  • Municipal Bonds: These are bonds issued in the counties by the local government authorities. They are usually pre-empted from taxes and pay a lower interest rate than the government bonds. These are moderate-risk fixed income investments. They offer lower return on earnings. 

  • Bond Mutual Funds: These are mutual funds invested in bonds at higher interest rates. This is an excellent option for people who have minimum amount of fixed income investment. A diversified array of bonds will deliver better returns. Short term fixed income investments.

Preferred Stocks offer the holder equity stake and a fixed dividend but they have no voting rights. Their dividends are paid on priority before any dividends on common stocks are paid to the stockholders. 

Benefits Of An Advisor

  • The advisor will be able to exploit the market inefficiencies and strategise according to your financial needs.

  • They have the capacity to form a fully diversified global portfolio from many individual investment funds at attractive returns. This reduces the risk factor on a personal front and becomes collective-risk. 

  • Their research team is fully knowledgeable and have strong networks with the local economies and regulations. This saves a lot of time and energy that is required on an individual basis. It is the best option for making a profitable decision. The researchers are also aware of the fluctuating market conditions.

Evaluate A Bond

  • Evaluate the goals and investment guidelines of the bond fund.

  • Clarify the maturity date and conditions associated with it.

  • Compare the price fluctuation with varying interests.

  • Determine the credit rating for evaluating the bond.

  • Determine the total income from the investment.

  • Ensure you invest with a professional fund manager from a trustworthy company.

  • Account for the fees like redemption fee and annual fee of the fund manager while planning.

Fixed Income Investment Strategy

An investor who wants to preserve his capital and also make a moderate income at low risks can plan accordingly:

  • Make a plan based on financial goals, risk tolerance and budgets. 

  • Then evaluate the options and risks in detail regarding income, deposit, risk and tax benefits.

  • Research and monitor the investments made.

  • Diversify your investments preferably for added advantages of higher earning at lower risks.

  • Consider your tax situation.

  • Review your investments frequently and take the necessary action.

Risks Of Fixed Income Investments

The fixed income investments are less risky than stocks and shares. Let us evaluate the risks involved in making a fixed income investment.

  • Interest rate risk is a significant risk while making an investment. The new bonds are issued with higher yields that reduce the par value of the old bonds. Holding a bond until its maturity is a way of balancing this risk option.

  • Credit Risk is when the issue defaults on payments. Ensure higher credit ratings of the company before actually buying a bond.

  • Inflation risk occurs as fixed income investments stretch over a longer period of time. Investing in government bonds is a way to overcome this risk. 

  • You face Reinvestment Risk when you purchase new bonds at lower interest rates. Consider the implications of price and income fluctuations of the bond that will in turn affect the returns. 

  • Call Risk is an option given to shareholders to repay the bond early. The interests stop and the principal amount are refunded early. This risk option further leads to reinvestment risk that reducing the fixed income.

  • Prepayment Risks are valid on individual bonds especially mortgage-backed bonds. The issuer may repay the principal before the maturity date forcing the investor to reinvest at lower interest rates.