Investor Education Centre > Income Producing Investments > Fixed Income Products: What’s all the fuss about?
Fixed Income Products: What’s all the fuss about?
Fixed income products are a staple in investor portfolios worldwide; yet like the quiet cousin at your family gathering, they are far less popular than other types of investments here in Australia. So what are fixed income products exactly, and why should you consider adding them to your own investment mix?
Put simply, fixed-income products are debt instruments used by governments, corporations or other entities to raise the money they need to expand or finance their operations. Investing in fixed income products – such as bonds and bond ETFs – as a portion of your total portfolio can provide reliable income generation, protect against market volatility and safely preserve your capital. Let’s take a look at each of those benefits in more detail.
1) Income Generation - The first and most obvious benefit of fixed income products is – you guessed it – income generation. The reason people who have retired or are about to retire tend to invest more heavily in fixed income products is because when you’re retired, you need to replace the income stream that was previously generated by your work. Without a job, fixed income products offer a way to generate consistent (usually monthly) income distributions to fund your retirement.
2) Protect against market volatility - Fixed income investments like bonds aren’t subject to market volatility the way equities are, making them an attractive way to balance the risk and volatility associated with equity investing. What’s more, the market forces that influence fixed income asset values often move in different directions and at different times than the forces that affect equity markets, meaning that while your share prices are dropping in value, your fixed-income assets could be rising.
3) Safety - Investing in bonds is generally much safer than investing in equities, meaning you can usually expect that the money you invest is going to be there by the time your investment matures. Because the upfront investment and ongoing payments are all known and fixed in advance (unlike with equities), investors can expect with reasonable confidence that they will receive their money back at the end of the investment period, plus all the payments that were outlined when they first invested.
Risks of Fixed-Income Investing
There are risks associated with fixed-income investing, of course. The most prominent among them is the possibility of earning lower long-term returns than with equity or emerging market investments. Because fixed-income investments are generally much safer than equity investing, the returns associated with them tend to be accordingly lower as well. This can make it more challenging to meet your long-term investment goals, which is why fixed income investment products are generally best enjoyed like fine wine and dark chocolate: in moderation.
Regardless of whether you are just beginning to build an investment portfolio or are ready for retirement and planning to start drawing an income from your nest egg, fixed-income products represent a critical tool in the toolbox of investment options available on the market. If you don’t own any assets in the category, now is a great time to consider adding some to your portfolio.
This website contains general information only and is not intended to provide any person with financial advice. It does not take into account any person's (or class of persons) investment objectives, financial situation or particular needs, and should not be used as the basis for making investments.