Fixed Interest

Bounding by the Bonds..

Fixed income funds are also known as bond funds. They may invest in company (‘corporate’) and government bonds. Bonds are given a risk rating by ratings agencies. If the agency classifies a bond as high risk, it will usually be categorised as ‘high yield’, because a higher rate of interest is offered to compensate. If the ratings agency thinks the risk is lower, the bond will usually be categorised as investment grade. Government bonds from developed countries are generally deemed to be the least risky. Strategic bond funds can invest in all these types of bonds, but other funds are limited to one or two areas.

Australian superannuation funds have around a 50% average allocation to shares — the second highest in the developed world — with APRA regulated industry funds allocating around 17% to fixed interest.


PROs of getting exposed to Fixed Income Funds

Diversification from stock market risk


If you’re seeking to grow your wealth investments over time to avoid wasting for retirement or other long-term goals, you almost certainly hold a big amount of stocks in your portfolio. But by allocating some of your portfolio to fixed income investments, you’ll be able to potentially help offset losses when stock markets swing.

Capital preservation


Capital preservation means protecting absolutely the value of your investment via assets that have a stated objective of return of principal. Investors who are closer to retirement may depend upon their investments to supply income. Because fixed income typically carries less risk, these assets may be an honest choice for investors who have less time to recoup losses.

Income generation


Fixed income investments can facilitate your generate a gradual source of income. Investors receive a hard and fast amount of income at regular intervals within the variety of coupon payments on their bond holdings. Within the case of the many, the income is exempt from taxes.

Security


Fixed income investments are typically less volatile and rank high on a company’s capital structure.


Common Fixed-Income Securities

Bonds

A bond is an obligation or loan made by an investor to an issuer (e.g. a government or a company). In turn, the issuer promises to repay the principal (or face value) of the bond on a fixed maturity date and to make regularly scheduled interest payments (usually every six months). The major issuers of bonds are governments and corporations.


Treasury bills

Treasury bills (T-bills) are the safest type of short-term debt instrument issued by a federal government. Ideal for investors seeking a 1- to 12- month investment period, T-bills are highly liquid and very secure.


Banker’s Acceptances

Banker’s Acceptances (BAs) are short-term promissory notes issued by a corporation, bearing the unconditional guarantee (acceptance) of a major Chartered Bank. BAs offer yields superior to T-bills, and a higher quality and liquidity than most commercial paper issues.


 Preferred Stocks

Companies issue preferred stocks that provide investors with a fixed dividend, set as a dollar amount or percentage of share value on a predetermined schedule. Interest rates and inflation influence the price of preferred shares, and these shares have higher yields than most bonds due to their longer duration.


Risks Associated with Fixed Income Securities

Interest rate risk


When interest rates rise, bond prices fall, meaning the bonds you hold lose value. Interest rate movements are the major cause of price volatility in bond markets.

Inflation risk


Inflation is another source of risk for bond investors. Bonds provide a fixed amount of income at regular intervals. But if the rate of inflation outpaces this fixed amount of income, the investor loses purchasing power.

Credit risk


Credit risk is the possibility that an issuer could default on its debt obligation. If this happens, the investor may not receive the full value of their principal investment.

Liquidity risk


Liquidity risk is the chance that an investor might want to sell a fixed income asset, but they’re unable to find a buyer.

Investor Forum

Any advice provided by Laverne is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.