What Is Fixed-Income?
Upon maturity, investors are repaid the principal amount invested.
Additionally, fixed-income investors are paid before common stockholders in the event that a company goes bankrupt.
Types of Fixed Income:
Some common types of fixed interest products are:
- Government and corporate bonds
- Fixed-income ETFs
- Fixed-income Mutual funds
- Treasury bonds and bills
- Municipal bonds
- Certificates of deposit (CDs)
For most investors, fixed-income investments are a common component of a well diversified portfolio.
Depending on their investment style, the percent of their portfolio dedicated to fixed-income securities may vary.
For example, a risk-averse investor may choose to invest 60% in fixed-income products and 40% in equities, while a more aggressive investor may have 20% in fixed-income securities and 80% in equities.
One strategy for maximizing the return on investment from fixed-income securities is called laddering.
This is where an investor purchases a portfolio of bonds with staggered maturities.
For example, say an investor has $100,000 to invest in fixed-income securities.
Instead of buying $100,000 of one-year bonds, they may split the money into fifths and invest $20,000 each into one, two, three, four, and five-year securities.
When the one-year bonds mature, instead of buying more one-year securities, the investor will reinvest in five-year securities.
This way, the investor sees cash flow from their investments each year.