According to a report by the SIFMA, the US, being the largest fixed income market globally, was valued at $46 trillion towards the end of 2020.
Fixed income investing is popular among investors for its low risk and stable payout features. It is a great asset class if you want to diversify your portfolio and limit your risk against market volatility. Governments and corporations issue debt securities, which investors buy under this asset class.
The article will look at different fixed-income investment products you could explore and the advantages of investing in the fixed-income asset class.
Different Types of Fixed Income Products
Different government levels can issue debt securities, right from federal to local. Municipalities can also issue bonds to fund new projects. Publicly traded companies are the other institutions that can issue different types of bonds.
Different types of government securities are:
- Treasury Bonds
- Treasury Notes
- Treasury Bills
- Treasury Inflation-Protected Securities (TIPS)
- Municipal Bonds
As these securities are offered by the government, they are low-risk and low-interest products. Therefore, the liability in case of risk is managed by the government, securing your investment.
Different types of corporate bonds are:
- Commercial Paper
- Secured and Unsecured Senior Notes
- Collateral Trust Bond
- Equipment Trust Certificates
Corporate bonds can be investment grade or junk. Investment-grade bonds are backed by third parties; hence, they lower risk and interest rates. In comparison, junk bonds will have higher risk and higher interest rates.
Reasons to Consider Fixed Income Investing
Reliable Source of Income
As the owner of fixed income securities, you will receive a steady flow of income over specified intervals of time. When signing the contract, you will receive details such as interest rates and payout schedule.
Depending on the product, interest and dividend rates are secured, which lets you access a reliable stream of income even in the face of market volatility. So if you are a risk-averse investor or planning on retiring, fixed-income investments would be a relatively safe option to proceed with.
Principal Amount Security
These securities protect your initial investment. For example, when the bond matures, you will receive your initial investment back. You will also get the interest earned if the bond issuer does not default.
Comparatively, Low-Risk Plans Offered
Investing in any financial product comes with a certain risk involved. This risk cannot be eliminated but be limited with fixed-income investment products. Compared to the stock market, the volatility for these securities is much lower.
Government securities are dubbed as risk-free investments as the government absorbs the liability. In the case of corporate bonds, look for high-rated bonds. For example, S&P Global Ratings or Moody’s Ratings are popular credit rating agencies determining corporate bonds into investment and junk grade.
Broaden Portfolio for Stability
Fixed income investing provides a good hedge against market volatility. You get timely dividends irrespective of the economy doing good or bad. If you are starting in the field of investing or if you have a high-risk portfolio, fixed-income products would be a good step towards diversification.
The interest earned on bonds issued by local governments and municipalities is exempted from federal income tax. In addition, some fixed income plans have tax deferral features, meaning your interest can continue to compound and grow unless you make withdrawals.
One cannot eliminate risk from financial investment. It can, though, be limited by fixed income investing. There is a range of fixed income products offered in the financial market by governments and corporations alike.
Investing in these securities is ideal for novice investors and also experienced investors with a higher risk appetite. In addition, bonds can provide your portfolio with a layer of protection and provide stable returns in the long term.