What Is Fixed Income?
Upon maturity, investors are repaid the principal amount invested.
Additionally, fixed-income investors are paid before common stockholders in the event that a company goes bankrupt.
Types of Fixed Income
Some common types of fixed interest products are:
- Government and corporate bonds
- Fixed-income ETFs
- Fixed-income Mutual funds
- Treasury bonds and bills
- Municipal bonds
- Certificates of deposit (CDs)
For most investors, fixed-income investments are a common component of a well diversified portfolio.
Depending on their investment style, the percent of their portfolio dedicated to fixed-income securities may vary.
For example, a risk-averse investor may choose to invest 60% in fixed-income products and 40% in equities, while a more aggressive investor may have 20% in fixed-income securities and 80% in equities.
Utilizing Fixed Income
One strategy for maximizing the return on investment from fixed-income securities is called laddering.
This is where an investor purchases a portfolio of bonds with staggered maturities.
For example, say an investor has $100,000 to invest in fixed-income securities.
Instead of buying $100,000 of one-year bonds, they may split the money into fifths and invest $20,000 each into one, two, three, four, and five-year securities.
When the one-year bonds mature, instead of buying more one-year securities, the investor will reinvest in five-year securities.
This way, the investor sees cash flow from their investments each year.
Fixed Income FAQs
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.