What Is Fixed Income Investing?

Definition & Examples of Fixed Income Investing

Definition

Fixed income investing is an investing strategy that focuses on very low-risk investments that pay out consistent income.

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Fixed income investing is an investing strategy that focuses on very low-risk investments that pay out consistent income. Depending on your age and your financial goals, the fixed income investment strategy may be ideal for you.

Definition and Example of Fixed Income Investing

Fixed income investing focuses on investments that pay a return on a fixed schedule. These returns could be dividends or coupon payments. Those who are looking to adopt this method often focus on low-risk investments. These may be bondsbond mutual funds, money market funds, certificates of deposit (CDs), and blue chip stocks.

How Fixed Income Investing Works

Fixed income investing involves certain goals that make assets like bonds, money markets, and CDs the best options. These investments are among the safest. Most people with a fixed income investment strategy want to preserve their capital.

These assets also have reliable payouts on a fixed schedule. You can count on them serving as an additional income source. You know exactly how much you'll be getting and when you'll be getting it, allowing you to avoid dealing with the market's volatility.

Note

It's still important to have diversification among your fixed income investments.

Retirement is the most common reason for using fixed income investing. It's a time in life where stable and predictable returns are very important. A retiree might rely on income sources that produce the same amount of income on a year-to-year basis. They may also prefer those that increase at a low, nominal rate, such as pensions, annuities, or investment accounts,

Pros and Cons of Fixed Income Investing

Fixed income investing can be a good strategy for those with a focus on capital preservation, but it might not be right for everyone.

Pros
  • Capital preservation

  • Income generation

  • Low risk

Cons
  • Risk of inflation

  • Interest rates may rise

  • Risk of default

Pros Explained

  • Capital preservation: Capital preservation is about ensuring that the money you invest doesn't lose any value. You don't have to worry about losing your principal with most investments that have a clearly stated return amount and schedule. The principal amount may be inaccessible during the term of the investment, but it won't lose any value.
  • Income generation: Fixed income investing provides a reliable additional source of income. With interest rates higher than the majority of standard savings accounts, this is a great way to get more value for your money and let it work for you.
  • Low risk: Fixed income investing allows people to invest without stressing over stock market risk. Many factors outside your control can affect how a stock performs. The arranged schedule of fixed income investments makes most of them immune to this issue.

Cons Explained

  • Risk of inflation: Assume an average rate of inflation of about 3.24% when you're planning for any long-term investment objective. Fixed income investments often have lower returns. You may find it difficult to get yields that outpace inflation without taking some risk.
  • Interest rates may rise: Bond prices move in the opposite direction of interest rates because of the effect the new rates have on old bonds. New bond yields are higher and more attractive to investors when interest rates are rising. Old bonds with lower yields are less attractive, thereby forcing prices lower.
  • Risk of default: Fixed income investments are generally some of the safest offered, but no investment is 100% risk free. Bonds are always at some risk of default, especially those from corporations. It can happen if a company faces financial problems and can't repay its debts.

Key Takeaways

  • Fixed income investing involves investing in very low-risk assets with regular payouts.
  • Retirees are the most common adopters of the fixed income investment method.
  • One of the biggest disadvantages is that the returns might not outpace inflation.
  • Fixed income investing is a good strategy for those who are concerned with capital preservation.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Trading Economics. "United States Inflation Rate 1914-2020 Data."

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