Fixed-income investments are an essential component of any sound investment portfolio. They help toward adding stability and diversification. Suppose you want to learn more about fixed-income products and how to include them in your portfolio for the best effect. You’ll find the information you wish for in this Moneyfarm investment strategy blog.
| Is fixed income high risk? | Fixed income is a low-risk investment |
| What are examples of fixed income investments? | Gilts, corporate bonds, convertible bonds, junk bonds, |
| Can I buy and sell fixed income investments as I would shares? | Yes, as they are traded on the stock market |
| What risks come with fixed income investments? | Risks include credit, liquidity, inflation, interest rate, etc |
What is fixed income investing?
Fixed income investments are typically available in products such as corporate and government bonds and other vehicles we will discuss later. As a point of interest, the NS&I used to offer Guaranteed Income Bonds or NSI fixed rate bonds, but the sale of new bonds was withdrawn in April 2018.
Fixed-income investing refers to investing in securities that reward the investor with a fixed dividend or interest rate until the account’s or fund’s maturity date is realised.
How fixed-income investments work
The most common type of fixed-income securities is fixed-interest bonds. They are issued by businesses and governments to raise money. Here in the UK, government bonds are known as Gilts. In the US, they are known as Treasury Bills (or T-bills for short), while German federal bonds are known as Bunds.
The bond issuer of fixed-income bonds agrees to pay the investors a fixed rate of interest over a set period – often 3 to 5 years. During that period, the investment accrues interest at the previously agreed rate regardless of things like the ups and downs of the BoE bank rate. When the fixed term ends, the bond provider returns the original investment plus any accrued interest to the investor unless the interest is withdrawn as regular income.
The fixed-income products available
As well as government and corporate bonds, other fixed-income investments open to you here in the UK include convertible bonds and PIBSs. Convertible bonds are like corporate bonds but come with the option to convert them into shares or cash of the same value. PIBSs (Permanent Interest-Bearing Shares) are fixed-interest investments issued by building societies.
When choosing a monthly income investment bond, you should take note of its credit rating. It is an indicator of how risky the bond is. Although, fixed income investment bonds are considered less risky, some so-called high-yield bonds, although offering higher interest rates, also carry much more risk – so much so that they are often referred to as “junk bonds.”
The bond credit rating system will help you to identify which bonds are considered riskier. Anything with an AAA down to a BBB credit rating is considered investment grade and less risky. Bonds with BB and B ratings are riskier, while those with C, CC and CCC are significantly riskier and can be considered to be junk bonds.
The pros and cons of UK fixed-income bonds
Your investor profile will point you in the right direction when it comes to your preferences on how to invest money. For example, if it’s fixed-income security you’re after, bond funds could be right for you. But before you make your mind up, consider these pros and cons.
The advantages of UK fixed-income bonds
- Guaranteed lump sum payment at the end of the fixed term
- A steady rate of interest (depending on the type of fixed bond)
- A fixed bond is one of the less risky form of investments
- This type of fixed-income asset takes priority over share dividend payments, and payouts are given priority ahead of shareholders in the case of insolvency
- UK fixed-income bonds are focussed on generating a reliable, fixed income
- They usually offer higher rates of interest than easy-access savings accounts
The disadvantages of UK fixed-income bonds
- It may not be possible to withdraw your investment midterm
- Even a fixed bond with a high yield usually offers lower returns than shares.
- These types of fixed investment assets can be sold before they mature, but at the current interest rate at the time of sale, which means your investment could be devalued.
- It can be more expensive if you construct a diverse portfolio by purchasing individual fixed-interest bonds.
Investing in the ESG Bond asset class
Today, more and more investors are turning to ESG (Environmental, Social and Governance) fixed-income investments, and you might be pleased to know that there is a wide choice of ESG bonds available. There are more than 1,300 ESG bonds from over 350 issuers worldwide, including corporates, development banks, financial institutions, government-backed entities, municipals, pure-play issuers, and sovereigns.
Their ESG bonds are grouped into four categories:
- Green
- Social
- Sustainable
- Sustainable linked
If the ESG asset class of bond is of interest, this website will be of interest.
Fixed Income ETFs
Another fixed-income asset vehicle is fixed-income ETFs. They are an excellent way of creating a diversified portfolio of fixed-income bonds. If you want to discover more about this particular asset class, the blog entitled “How to invest in ETF products” on the Moneyfarm website is well worth reading.
Suppose you are not an experienced investor or need more time to manage your investments. In that case, you can opt for passively managed ETFs, meaning that the portfolio manager is essentially a set of algorithms.
Although Bond ETFs are an excellent way of creating a fixed-income portfolio, you still must remember that even the best fixed-bond interest rates will be substantially lower than those offered by a shares-based ETF or stocks and shares ISA.
How to invest £100,00
If you have a large sum of money to invest – say £100,000, for instance- you will need to consider various things. One of the principal concerns will be the safety of investing so much money, which is where a fixed-return investment could be relevant. An article entitled “Are fixed-term investments safe” on the Moneyfarm website carries some handy information.
Another factor to consider before jumping into fixed-income investments is your short vs long financial needs.
While fixed-income strategies are more of a safe haven for your investment, they require you to lock your money away for a specific term – generally anywhere from one to five years. If you cannot access your funds when you need them to cover an emergency, or you lose money due to withdrawing the funds before the term is up, it may not be a good idea to sink the whole £100,000 into a fixed return investment.
Having reviewed your short versus long-term financial needs, you may decide that opening a general investment account would be more appropriate.
A general investment account allows you to create a diversified portfolio that can include investing in bonds as fixed-income assets alongside other investments. These additional investments can offer better interest than even the best fixed bond interest rates, and they may not penalise you for withdrawing funds as and when you need them.
FAQ
Who should I invest in fixed income investments?
Fixed income investments are best suited for investors looking for regular interest payments on their investments while preserving the value of the principal upon maturity. It is also for risk-averse investors who do not like stock market volatility. You may be interested in investing in fixed income investments if you’re looking to diversify your portfolio against volatility.
What is the least risky fixed income investment?
One of the least risky fixed income investments will be government bonds. Government bonds help investors mitigate some of the risks associated with traditional investment vehicles as they have low credit risk due to a sovereign guarantee.
What are the disadvantages of fixed income investments?
Fixed income investments usually offer lower interest rates as they are safer securities than risky assets like stocks. There is interest rate risk that affects fixed income investments like bonds. When interest rates on bonds go up, the price of bonds falls. Also, access to funds may be an issue if you have your funds locked up in fixed income investments such as certificates of deposit.
*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.
