Fixed Income Investments Explained

Reviewed: July 16, 2014
By FinanceWeb
When a person takes advantage of fixed income investments, this means that they invest money with the expectation that a return will be gained according to a fixed schedule. The amounts of return that they acquire, however, are not usually fixed. Instead, the amounts can greatly vary, but still yet, a gain is a gain, and fixed income investments are not meant to lose money whatsoever. Most commonly, people invest in individual bonds as a form of fixed income investment, but other forms do exist, including money market funds, ETFs and more.

Individual Bonds

These types of bonds bear interest, and the issuer of them is required to pay the person who purchased the bond a certain amount of money according to specific intervals. When the loan has matured, the issuer is then required to pay the bondholder the principal amount of the bond as well. These bonds are advantageous because they provide a regular form of income and can be greatly diversified.

Bond Funds

With bond funds, a person will hand over his or her money and allow a professional portfolio manager to invest the money. Most times, the money is invested into individual bonds. Liquidity and income generation are two benefits of bond funds.

Exchange-Traded Funds (ETFs)

ETFs are a bit more confusing than individual and regular bonds. ETFs are considered to be “baskets of investments.” They are traded numerous times throughout the period of a day, and often times, they are passively managed. They do provide a great way to diversely invest money, and even better is the fact that they allow for intraday trading to take place.

Certificates of Deposit (CDs)

These types of investments pay the holder a fixed income over a set period of time; the interest paid is usually a fixed amount. CDs offer flexibility, liquidity, and they are also insured by the FDIC.

Money Market Fund

This type of fixed income comes in the form of a mutual fund. The money invested tends to come with minimal credit risk, which is good, but the maturities of the funds tend to be short. The money profited from these funds usually qualifies for tax advantages.

Tips for Choosing the Best Fixed Income Investments

There’s no right or wrong answer for the question “what are the best fixed income investments?”. A person’s individual financial status will determine which investments are right for him or her. For a person who is wealthy and financially secure, then riskier investments are okay. On the other hand, for a person who has little financial security, it’s imperative to take advantage of less riskier investments, which include individual bonds and CDs.