The pandemic has made all of us realize how essential is it to save and invest. Undoubtedly, there are way too many options to choose from that leaves you overwhelmed. While people are now looking for opportunities to invest and learn more about it, very few know in-depth about the splendor of the fixed income investment. So let’s dig deeper!
“Fixed-income investment is basically designed to provide people with a steady stream of income on a regular basis, mostly in the shape of interest income from bonds. Though in theory, fixed income investment is valued for its lower risk profile than stocks,” says Philip Barach, former President of DoubleLine Capital LP, the US leading fixed income investment management firm.
Divergence from Risk of Stock Market
Fixed-income investment is mostly praised for its low risk than stocks and shares. Philip Barach explains that fixed-income assets are generally less volatile to macroeconomic risks, such as economic downturns and geopolitical events, which make it a safer investment option.
“If you desire to grow your wealth with investments over time or save for retirement or have other long-term financial goals, you probably hold a significant amount of stocks in your portfolio. Yet, by allocating a portion of your portfolio to fixed-income investments, you can potentially help offset losses when stock markets swing. As it is said, do not put all your eggs in one basket,” says Barach.
Capital preservation involves guarding the absolute value of your investment via assets that have a stated objective of return of principal. Investors who are closer to retirement may rely on their investments to provide income. Because fixed income typically carries less risk, these assets can be the right choice for investors who have less time to recoup losses. However, you should be mindful of inflation risk, causing your investments to lose value over time.
Fixed-income investments can help you generate a steady source of income. Investors earn a fixed amount of income at regular intervals in the form of coupon payments on their bond holdings. In the case of many municipal bonds, the income is exempt from taxes.
Some fixed-income assets offer the potential to generate attractive returns. Investors can seek higher returns by assuming more credit risk or interest rate risk.
The Biggest Perk of Fixed Income Investment
The greatest advantage of opting for a fixed income investing is that it offers investors a stable stream of income over the life of a bond while giving the recipient—like a business—access to immediate cash or capital. Therefore, having a steady income allows investors to plan out their spending, which makes fixed-income investments all more alluring additions to many retirement portfolios.
Additionally, some of the fixed-income investments get special tax treatment that could take the sting out of Tax Day each year—especially municipal bonds, which are usually tax free at the federal, state, and local levels. “Treasury bonds, while subject to federal taxes, are also free from state and local taxes. In fact, fixed-income investments add vigorous diversification to your investment portfolio, balancing the highs and lows of investing in stock mutual funds,” says Philip Barach.
However, one major thing that investors must be mindful of while choosing the fixed income investment options is that fixed-income investment is the safer option, not the ‘safest,’ and totally risk-free. “It comes with its fair share of disadvantages that include low return on investment. Also, their values fluctuate as well, and you can lose money investing in bonds. So, the tip is to play safe even if you are playing on the safer ground,” says Philip Barach.