A financial investment that ensures a guaranteed rate of return is said to generate fixed income. Investors are keen to generate fixed income instruments to their portfolios to lower risks and add some guaranteed income streams. Bonds are a type of financial instrument that yields fixed income but with low interest rates. Savings accounts and Certificates of Deposit (CDs) are also considered in the fixed income category, although usually yielding less than bonds. Some investors consider real estate investment a form of fixed income generation if they have long term tenancy agreements in place that generate monthly rental returns.
How to Generate Fixed Income?
Individual bonds are managed actively and provide fixed income stream to buyers, while offering them flexibility. Investors can sell these bonds before their maturity time if they want to invest in an option that yields better returns. Some of the highly popular individual bonds are the US Treasury bonds, agency bonds, municipal bonds and corporate bonds.
US Treasury bonds: These are issued by the US Department of Treasury. As a result, these bonds are considered to be secure investments.
Agency bonds: These are offered by various US government agencies and known to offer higher return.
Municipal bonds: These are issued by local and state governments. Municipal bonds are popular investment options for those who require fixed income over the intermediate- to long-term periods.
Corporate bonds: Offered by both private and public corporations, these bonds comprise varying risks and returns profiles. This also depends on the financial condition of the issuing company.
Savings accounts: These are maintained by financial institutions spanning mutual savings banks, savings and loans associations, and commercial banks. The main advantage is that it pays regular interest on the deposited amount.
Certificate of deposit (CD): This is a risk-free time deposit that pays fixed interest till the end of its term. This is offered by credit unions, banks and thrifts institutions.
Benefits of Fixed Income
- It reduces instability in an investment portfolio by lowering the overall risk profile.
- The dividends received from fixed income securities can be utilized to generate income from other sources.
- Federal, state and municipal governments do not levy taxes on certain fixed income investments.
Risks Involved in Fixed Income
Risks associated with bond funds and individual bonds are as follows:
- The prices of bonds decline if the rate of interest increases.
- The purchasing power of the income and the invested capital reduces due to inflation.
- Risk of default occurs in bonds.
Despite these risks, people are keen to opt for investments for fixed income so that they can live in the comfortable, hassle free manner they are accustomed to.