What is Fixed Income Asset Class?
From the early days of our existence, most humans have always looked for ways to increase their earnings. This is because human wants are insatiable. Responsibilities are never-ending, hence the need for more than one source of income. Some people work two jobs in other to have extra income. But over the years, investments have become the most popular way to have an alternative source of income. Hence financial advisers usually advise people to save and invest in the long run and get their money to work for them.
Investing in assets is also one of the ways to make extra income. There are four major asset classes, including cash and cash equivalents, fixed income, Real assets, and Equities. In this article, we will be x-raying fixed-income assets, its benefits, types, and the best way to invest in fixed-income assets.
What is Fixed Income?
Fixed income can be defined as any investment in which the borrower or issuer is obliged to make payments of a fixed amount on a set schedule. For example, the borrower may pay interest at a fixed rate once a year, quarterly or monthly, and repay the principal amount on maturity.
What Are Fixed-Income Assets?
These are assets that produce a fixed income return (amount) for its owner on a yearly or monthly basis or in any form of periodic payments. These assets include money market funds, government, and corporate bonds. We also have Exchange-traded funds (EFT), etc. These assets offer a fixed income with fewer risks than stocks or other investment options.
Benefits of Fixed Income
Smart investors prefer fixed income or passive income as opposed to other kinds of income for many reasons, and these include;
There are varieties of fixed-income products available in the market today. We have treasury bills, guaranteed investment certificates (GICs) through corporate and government bonds. Additionally, you can buy Eurobonds, step-up bonds, real return bonds, strip bonds, and many other U.S. securities. This gives an investor the liberty of choosing where to invest their funds.
The majority of bonds pay interest semi-annually. Some pay it monthly, quarterly, or even annually. Your income will be consistent and predictable thanks to these installments. This steady flow of income can also serve as a source of liquidity for non-investment expenses. It can lessen the volatility of your portfolio’s returns. This also helps you plan your cash flow appropriately.
High-quality bonds like corporate bonds and those issued by the Government of the United States offer a high level of security. Holding high-quality bonds until maturity will ensure that you receive full interest repayment. Moreover, bond investments held at brokerage firms are backed by the Securities Investor Protection Corporation (SIPC). Also Fixed, income C.D.s have Federal Deposit Insurance Corporation (FDIC) protection offers up to $250,000 per individual.
Convenience – You can purchase guaranteed investment certificates, bonds, and other fixed-income investments online. You can also gain fixed-income exposure through various mutual funds and exchange-traded funds, also available online.. This ease of transactions also makes fixed income a ready choice for investors.
An investment is an asset or item acquired to generate income or appreciation. Note that appreciation in this context refers to an increase in an asset’s value over time. Investing solely aims to generate income and increase value over time. This includes buying bonds, stocks, or purchase of real estate properties, amongst others.
However, because investment is geared towards the potential for future growth or income, there is always a certain level of risk associated with investments.
Types of investments include; Stocks and equities, bonds, fixed-income securities, index funds and mutual funds, real estate, commodities, Cryptocurrencies, and collectibles.
Types of fixed-income investments
This type of investment is similar to Treasury bonds, and municipal bonds are issued by state and local governments. They function essentially in the same way. Municipal bond interest is often exempted from both federal and state taxes (although this can vary from state to state). They usually offer lower yields than other types of bonds. Investors already in high tax brackets are frequently advised to use these.
Municipalities also can enact additional levies to reimburse investors, making municipal bonds relatively low risk. The five-year municipal bond default rate was just 0.07% between 1970 and 2016.
Treasury securities, which are the federal equivalent of municipal bonds, have dominated the U.S. fixed-income market since 2012. It accounted for nearly 37% of its entire value in 2019. The U.S. government issues and backs these assets, which come in three varieties: notes, bills, and bonds.
The length of time it takes for each of these three to mature makes them the most different from one another. Bills take up to 12 months, Notes take 2 – 10 years, and Bonds take 20 or 30 years.
Corporate bonds are the next level up in terms of risk/reward. Municipal and treasury bonds are the lowest-risk, lowest-return options among popular fixed-income assets. About 21% of the market for fixed income in the U.S. is made up of these investments.
Corporate bonds behave similarly to Treasury securities, except that you’re lending money to a business rather than the government. Generally speaking, your investment will be safer the company is more established and solid. The credit ratings of the company is relevant in this situation. Since highly rated corporations have the lowest default rates, their bonds provide viable options for dependable fixed-income investments.
High Yield Bonds
Junk bonds also referred to as high-yield bonds, are found as you move up the risk/return ladder. These fixed-income instruments don’t meet the credit rating agencies’ investment-grade standards. Still, as their name implies, they typically pay higher interest rates for taking on more risk.
High-yield bonds still made up 5% of the whole fixed-income market as of December 31, 2018, despite their unflattering nickname.
Best Way To Invest In Fixed Income
Fixed-income investment is often a conservative strategy. It generates profits from predictable interest-paying low-risk instruments. The interest coupon payments are often smaller because the risk is lower. Bonds, mutual funds, and certificates of deposit can all be included in a fixed-income portfolio (C.D.s).
The laddering strategy is one such fixed-income commodity technique. Using a laddering approach, you can invest in several short-term bonds. You will receive consistent interest income. The portfolio manager extends the ladder of short-term bonds by reinvesting the refunded principal as bonds mature. Using this technique, the investor can obtain ready funds without missing out on the rising market interest rates.
A $60,000 investment, for instance, may be split up into bonds with terms of one year, two years, and three years. The principle is divided into three equal parts of $60,000 by the investor, who puts $20,000 into each of the three bonds. The $20,000 principal will be rolled over into a bond with a one-year maturity. This will follow the original three-year holding when the one-year bond matures. The proceeds roll into a bond that extends the ladder by another year when the second bond matures.
In this manner, the investor enjoys a consistent interest income return. The investor can benefit from any interest rate increases.
The above illustration is the best way to invest in fixed income as it gives the investor leverage while maximizing profits.
Investing in fixed-income assets has proven to be one of the wisest investment decisions. This is due to the low risk and guaranteed periodic returns it offers. The variety of options also available makes it much more appealing to investors. If you are looking for where to put your idle funds while gaining steady returns, you should pick a fixed-income asset today. Contact REICG which is a real estate investment fund designed to provide consistent, programmatic, equity growth uncoupled from the public markets and changing real estate values.