What Is Fixed Income Investing? | Bankrate (2024)

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Fixed-income investing is a lower-risk investment strategy that focuses on generating consistent payments from investments such as bonds, money-market funds and certificates of deposit, or CDs. Many people shift their portfolios toward a fixed-income approach as they near retirement, since they may need to rely on their investments for regular income.

While fixed-income assets are generally less risky than investing in growth-oriented investments like stocks, the approach is not risk free. Here’s what you need to know about fixed-income investing.

How fixed income investing works

Fixed-income investing focuses on giving you a consistent – a fixed – stream of money. Let’s say you decide you are comfortable putting $10,000 in a fixed income investment. Here are some key things you’ll look at when examining fixed-rate investments:

  • interest rates of a range of different products
  • the timeline for when they’ll pay you
  • their maturity dates for when you can retrieve your principal
  • the likelihood that you’ll be repaid

Do you want to be able to get your original $10,000 back in a year? Three years? Or are you looking to stash that money for an even longer period of time? Throughout that time, how frequently do you want to be paid? These are the types of questions you’ll be asking.

Once you’ve nailed down your specific needs, you’ll invest your money, and you can use those regular interest payments to cover your expenses.

Is fixed income investing right for you?

Fixed-income investing can be a particularly good option if you’re living on an actual fixed income and looking for ways to maximize your savings. And if you’re worried about the wild ups and downs of the stock market, fixed income investing can help you sleep a bit better at night.

“Fixed income investments can provide a degree of stability, especially for investors who are holding such investments for their income-generating ability and not actively trading based on price changes,” says Elliot Pepper, CPA, financial planner and co-founder at Maryland-based Northbrook Financial. “Investors who are less concerned with capital appreciation or are less tolerant of big market swings could be better served in a portfolio that provides the predictable return from a stream of income payments.”

Fixed-income investments are often paired with stock investments to create a more diversified and lower-risk portfolio. Fixed-income provides stability and regular cash flow, while stock investments offer growth over time, albeit at the expense of volatility. So a good investor can design a portfolio with both elements to meet their short- and long-term needs.

“We will typically consider an investor’s time horizon and risk tolerance in order to determine the appropriate balance of more conservative fixed income investments versus more aggressive equity or other investments,” says Pepper.

What are examples of fixed income investing?

If you’re considering fixed-income investments, you can pick from a wide range of products.

Federal government bonds: The federal government needs to raise capital, so it issues a range of fixed-income investments such as Treasury bills, Treasury notes and Treasury bonds. They come with a wide range of maturities (as little as four weeks and as long as 30 years), and most of them make regularly scheduled payments of accrued interest, which are known as coupons. Treasury bills pay the interest and return the principal at the end of the term.

“Typically, U.S. Government bonds are afforded the ‘safest’ label with regard to default risk,” Pepper says.

Municipal bonds: City, county and state governments also need capital to cover the costs of big projects such as a new interstate or new schools. These are also fairly safe investments, but there are still risks of default. One advantage of municipal bonds is that they’re typically tax-free in the state they’re issued in and free of federal tax, offering potentially more attractive returns.

Corporate bonds: As corporations work to grow, they need money, and corporate bonds can be a win-win for the companies who get capital and the bondholders who earn regular income. However, it’s important to note that some corporations are much financially healthier than others. Be sure to understand how a company generates cash flow from its business, because that’s likely how it will pay interest on the bonds. If the company runs into financial hardships and can’t make payments to bondholders, you could lose a portion or all of your investment.

“Bonds issued by certain corporations with a low credit rating, referred to as ‘junk bonds,’ will carry a higher interest rate,” Pepper says, “but the risk of default is much higher.”

Certificates of deposit (CDs): Certificates of deposit are available at banks and credit unions, and those financial institutions will pay a premium for your willingness to park your money for an extended period of time – anywhere between three months and five years or more. Instead of having easy access to your money in a savings account, a CD typically requires you to pay a penalty if you want to get your principal prior to maturity.

Money-market funds: Money-market funds are a kind of mutual fund that invests in short-term debt securities such as CDs, Treasurys and other forms of short-term corporate debt. They can provide a liquid source of money, but their returns will fluctuate with prevailing interest rates.

Pros and cons of fixed income investing


1. May protect you during market turbulence

Remember the stock market plunge of 2020? Casey T. Smith, president of Georgia-based Wiser Wealth Management, says that kind of “major market sell-off” can serve as a reminder of how positive fixed-income investments can be. Smith adds that “there is no cheaper hedge to the stock market than U.S. Treasuries.”

That hedge can be especially important if you’re retired and looking for ways to earn an income while dealing with the short-term scares of market swings.

“In retirement, theoretically, all you have to do for a great long-term return is keep enough cash for expenses for a few years, then invest in broad core indexes like the S&P 500,” Smith says.

“However, realistically, investors in retirement cannot stand that much volatility and would end up selling stocks and then buying back at the worst times,”he says. “Instead of fighting human nature to make bad investment decisions, you can add bonds to portfolios to smooth out the short-term volatility. The idea is that if you [have a portfolio of] 50 percent bonds, you will be taking on half of the market risk.”

2. Steady returns

If you’re trying to plan for your expenses in retirement, knowing exactly how much money you will generate from fixed-income investing can simplify your budgeting. You’ll know exactly how much money is coming in from your investments and can plan around that income.

3. Potential tax benefits

Some fixed-income investments have positives when it comes time to pay your annual bill to the government. For example, interest income from U.S. Treasurys is exempt from state and local income taxes, and earnings from municipal bonds are not subject to federal taxes.


1. Potentially lower returns

Because of their relative safety, fixed-income investments typically earn lower returns than riskier assets like stocks. And that means you may be missing out on the potentially much higher returns from stocks.

That’s one of the challenges with avoiding risk. Those unsure stock investments can wind up paying off in a much bigger way than a fixed coupon payment. But ultimately, the type of investment you choose will depend on your circ*mstances and risk tolerance.

2. Interest rate risk

“The largest downside we typically see in fixed income is interest rate risk,” Pepper says.

The rule in bonds is that when interest rates rise, bond prices fall. So, let’s say you paid $2,000 for a 10-year bond with a 3 percent interest rate. After three years of holding the bond, interest rates on a new 10-year bond are at 4 percent. If you want to sell your bond early, you’re competing against products with a better earning potential, so the bond will be worth less.

Some fixed-income products such as bank CDs won’t see a decline in price, but you may have to pay a penalty for closing the CD early.

3. Issues with cash access

Remember that getting the money you have in fixed-income investments isn’t as simple as making a withdrawal from your savings account. For example, if you lock up your money in a five-year CD and need that deposit two years in, you’re probably going to pay a penalty.

Also, if you need to sell a bond prior to maturity and interest rates have gone up, you may be forced to sell at a loss because the market will reprice the bond based on current interest rates.

Bottom line

Fixed-income investments can provide some valuable stability to a portfolio that’s composed mostly of stocks, and it’s one reason that financial advisors include them in investors’ portfolios. The fixed income helps reduce volatility while providing a steady stream of cash flow, a trait that’s particularly valuable for older Americans who need the security of regular income.

What Is Fixed Income Investing? | Bankrate (2024)


What Is Fixed Income Investing? | Bankrate? ›

Fixed-income investing is a lower-risk investment strategy that focuses on generating consistent payments from investments such as bonds, money-market funds and certificates of deposit, or CDs.

What is the best fixed income investment? ›

Best fixed-income investment vehicles
  • Bond funds. ...
  • Municipal bonds. ...
  • High-yield bonds. ...
  • Money market fund. ...
  • Preferred stock. ...
  • Corporate bonds. ...
  • Certificates of deposit. ...
  • Treasury securities.
Mar 31, 2024

Is it worth investing in fixed income? ›

Potential benefits of fixed-income investing

“That's why fixed income is a great way to allocate capital, because it provides both income and return with stability,” Kyle says. Additionally, investing in fixed income can help balance out market volatility.

Can you make money in fixed income? ›

Investors who hold fixed income generate a return even when the stock market is down. Fixed-income investing is also a way to earn passive income: When investors own a fixed-income instrument, such as a bond or CD, they collect the income without having to manage any other considerations regarding the holding.

Can fixed income investments lose money? ›

Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

What is the safest fixed income investment? ›

Treasuries are generally considered"risk-free" since the federal government guarantees them and has never (yet) defaulted. These government bonds are often best for investors seeking a safe haven for their money, particularly during volatile market periods.

What is the safest investment with the best return? ›

These seven low-risk but potentially high-return investment options can get the job done:
  • Money market funds.
  • Dividend stocks.
  • Bank certificates of deposit.
  • Annuities.
  • Bond funds.
  • High-yield savings accounts.
  • 60/40 mix of stocks and bonds.

What is the disadvantage of fixed income? ›

As the main disadvantage of this type of investment, we can mention that its profitability is the lowest in the financial market. While higher risk may lead to higher profit, many investors choose to go the secured path, even if it means less reward.

What are the cons of fixed income? ›

“The largest downside we typically see in fixed income is interest rate risk,” Pepper says. The rule in bonds is that when interest rates rise, bond prices fall.

Does fixed income do well in recession? ›

Interest rates tend to begin to decline three months ahead of recessions and reach a cycle low about five months into recessions. During economic downturns, fixed income has been shown to provide diversification benefits and reduce the volatility of portfolios that include risk assets such as equities.

How do I start a fixed income? ›

Match your fixed income investments to your goals
  1. For long-term goals like retirement planning, child's education and marriage go with long-term debt funds - including long-term gilt funds.
  2. For medium-term goals like saving for emergencies go with debt funds with shorter maturities of less than 3 years.

How do you survive on fixed income? ›

7 Smart Ways to Live Well on a Fixed Income
  1. Live below your means. This maxim has never been more important than right now. ...
  2. Micromanage your budget. ...
  3. Avoid adding new debt. ...
  4. Consider moving for tax savings. ...
  5. Downsize to a smaller place. ...
  6. Have fun for free. ...
  7. Earn extra money on the side.

Is fixed income high risk? ›

Fixed-income securities commonly have low returns and slow capital appreciation or price increases. This is the trade-off for lower risk. Their prices tend to decrease slower as well. The initial principal amount is often inaccessible, particularly with long-term bonds with maturities greater than ten years.

What is an example of a fixed income? ›

Treasury bonds and bills, municipal bonds, corporate bonds, and certificates of deposit (CDs) are all examples of fixed-income products. Bonds trade over-the-counter (OTC) on the bond market and secondary market.

What is the number one rule of investing don't lose money? ›

"The first rule of an investment is don't lose [money]. And the second rule of an investment is don't forget the first rule. And that's all the rules there are." This quote from legendary billionaire investor Warren Buffett has become one of his most well-known aphorisms.

Are CDs fixed income? ›

Certificates of deposit, or CDs, are fixed income investments that generally pay a set rate of interest over a fixed time period.

How to get 10% return on investment? ›

Investments That Can Potentially Return 10% or More
  1. Stocks.
  2. Real Estate.
  3. Private Credit.
  4. Junk Bonds.
  5. Index Funds.
  6. Buying a Business.
  7. High-End Art or Other Collectables.
Sep 17, 2023

What is the best investment for monthly income? ›

Best monthly income plans you should consider
Monthly Income PlanMinimum period of investmentRate of returns
Pradhan Mantri Vaya Vandana Yojana (PMVVY)10 years7.4% p.a.
Systematic Withdrawal Plans (SWPs)5 - 40 years7-13%
Long-Term Government Bonds10 yaers or more6-9%
Mutual Fund Monthly Income PlansELSS Funds : 3 years8-15%
5 more rows
Apr 10, 2024

Where is the safest place to put your retirement money? ›

The safest place to put your retirement funds is in low-risk investments and savings options with guaranteed growth. Low-risk investments and savings options include fixed annuities, savings accounts, CDs, treasury securities, and money market accounts. Of these, fixed annuities usually provide the best interest rates.

Which investment pays the most interest? ›

Long-term certificates of deposit. Overview: Certificates of deposit, or CDs, are issued by banks and generally offer a higher interest rate than savings accounts. And long-term CDs may be better options when you expect rates to fall, allowing you to keep your money earning higher rates for years. Who are they good for ...

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