Fixed Income

Fixed income investments generate guaranteed rate of returns. Investments such as Bonds, Certificate of Deposits and Saving Accounts are examples of fixed income investments.

These instruments are basically debt instruments and provide a fixed rate of return for a specified period with a guarantee of capital. Fixed income instruments reduce risks and generate income stream for the investors. Normally, fixed income investment returns are very low in comparison to the growth investing such as stocks and options.

The capital appreciation is nearly zero as the income generated is distributed to the investor on regular basis. This type of investment is ideal and appropriate for investors such as pensioners who prefer fewer risks and aim at moderate regular income rather than huge returns or capital appreciation.

There are various instruments in the market for common public under fixed income category. Bonds issued by the federal government, state governments, municipal and corporate bonds are the major fixed income instruments. Saving accounts and Certificate of Deposits (CD) by banks are other major fixed income instruments. These investments guarantee a fixed rate of interest, irrespective of market conditions with security to capital.

The incomes can be availed regularly such as monthly, quarterly or yearly according to their requirements. Some instruments offer cumulative returns in the end of the term.

Fixed income investment offers many benefits. The primary advantage is that it offers regular income stream as well as reduces the risk to a great extent. Guaranteed regular income is a blessing for economically weaker sections such as pensioners and lower income groups. Else, they can not invest on high-yielding long-term investments such as stock markets, as the risks are higher.

Usually, the government bonds offer substantial tax benefits. On the social side, the funds generated by issuing such bonds are utilized for government’s welfare activities such as large infrastructure projects and healthcare schemes.

On the flip side, prices of bonds depreciate, if the interest rates increase. Another drawback of fixed income instruments is that the earning will decrease over a period as the inflation rate keeps increasing. Though the risk factor is minimal comparing to stock investing, there are certain elements of risks always associated with bonds as well. However, fixed income instruments should be a part of any investment portfolio in a ratio that offers cushion during stock market fluctuations. A perfectly balanced investment portfolio reserves certain space for fixed income instruments.