What is a fixed-income investment?

This low-risk investment strategy offers regular payments

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Investing is risky, but fixed-income investments offer regular income without the high risk of stocks and other assets. If you’re a retiree looking to de-risk your investment portfolio, or you simply don’t have the stomach for the ups and downs of the stock market, fixed-income investments may be for you.


Key insights

  • Fixed-income investments are financial securities that offer regular interest or dividend payments with low risk.
  • Bonds, U.S. Treasurys, money market funds, certificates of deposit (CDs) and high-yield savings accounts are examples of fixed-income investments.
  • Fixed-income investing is ideal for retirees and those with a low risk tolerance.
  • Fixed-income investments typically underperform the stock market over time.
  • You can lose money with fixed-income investing, though the risk of loss is much lower than with most other asset classes.

How fixed-income investing works

“Fixed-income investments are financial instruments that provide a return in the form of fixed periodic payments (typically interest and dividends) and the eventual return of principal at maturity,” said Ross Blount, a certified financial planner and owner of Springbok Wealth Partners in Denver. “They're like your reliable old friend, always there for you, rain or shine. Bonds, money market funds, CDs and certain types of annuities fall into this category.”

Investing in fixed-income assets allows you to earn passive income on a regular schedule, typically monthly, and generates a return without the volatility of riskier assets such as stocks. Retirees and those with a low risk appetite rely on fixed-income investments to fund their retirement lifestyle or diversify a larger portfolio.

When choosing fixed-income investments, it’s important to understand how they work. Most fixed-income products are bonds or savings products that are designed to fund banks, corporations or government entities. These bonds or savings accounts offer a steady yield that pays out regular interest payments in return for keeping your money invested.

Fixed-income investments are much lower risk than other asset classes, but that doesn’t mean they are risk-free. Some fixed-income investments can drop in value.

» MORE: What is a good investment?

Types of fixed-income investments

There are dozens of fixed-income investments to choose from. Here are a few of the more popular fixed-income investment choices and how they work:

  • Certificates of deposit (CDs): CDs are a type of savings account that offers high interest rates for locking up your funds until maturity. CDs are available from a few months up to 10 years in length, typically with higher rates offered for longer terms. There is usually a penalty for withdrawing funds early.
  • High-yield savings accounts (HYSAs): HYSAs are just like regular savings accounts but offer much higher interest rates. Interest is usually deposited monthly and compounds over time. There may be a limit on the number of outbound transfers you can make per month in an HYSA account.
  • Treasury bills: Known as “T-bills,” these short-term bonds can be purchased at a discount to the face value and earn interest on maturity instead of issuing regular coupon payments. T-bills have a maturity of one year or less.
  • Treasury notes: T-notes are medium-term bonds that have a maturity between two and 10 years, with coupon payments issued twice a year (semiannually).
  • Treasury bonds: T-bonds are long-term bonds that pay coupon payments semiannually and have a maturity between 20 and 30 years.
  • Series I savings bonds (I bonds): I bonds are a type of government savings bond that offers a low fixed rate plus an interest rate that is correlated with inflation. When inflation goes up, the yield on I bonds goes up, and vice versa.
  • Municipal bonds: Municipal bonds are state and local bonds issued by municipalities to raise capital for their needs. The income from municipal bonds is generally tax-free at the federal and state level.
  • Corporate bonds: Corporate bonds are bonds issued by private corporations that use the funds to raise capital. Corporate bonds usually pay a higher rate than government bonds, but they come with more risk. For example, if a company goes bankrupt, you may lose all your money from a corporate bond.
  • Bond funds: If you don’t want to buy individual bonds and prefer a diversified approach, you can purchase a bond fund. Bond funds hold hundreds (or thousands) of bonds with different risk profiles and maturities.

» MORE: CDs vs. bonds: how they compare

Pros and cons of fixed-income investing

Investing in fixed-income assets is ideal for risk-averse investors who want to earn steady passive income without a high risk of loss. But while bonds and CDs offer a fixed income, the returns aren’t as good as stocks, real estate and other assets. And though the investment risks are much lower, you can still lose money with fixed-income investing.

“A shift toward fixed-income investments is akin to installing shock absorbers in your financial vehicle,” Blount said. “When the roads of the financial world get bumpy, these investments can provide a smoother, more predictable ride. They're particularly suited when you're nearing your financial goals and can't afford a setback, or simply if your risk appetite is lower.”

Pros

  • Generates passive income
  • Fixed rate of return (in most cases)
  • Lower volatility
  • Potential tax benefits (government bonds)

Cons

  • Potentially lower returns
  • Bonds at risk when interest rates rise
  • Some investments illiquid

How to invest in fixed income

There are several ways to invest in fixed-income assets. Here are a few of them:

  • TreasuryDirect: You can invest in government bonds at TreasuryDirect.gov. You can create an online account and purchase directly through this website. Income from this site will deposit into your TreasuryDirect account, and you can reinvest proceeds or transfer them to your bank account.
  • Online broker: Most major online brokers offer access to bonds, both corporate and government, as well as bond mutual funds and index funds.
  • Robo-advisor: Robo-advisors are automated investing platforms that build an investment portfolio for you. A portion of your investments can be allocated toward fixed-income assets, usually bond index funds.
  • Investment advisor: If you have an investment advisor, you can talk about fixed-income strategies based on your risk tolerance and investing goals. The advisor can allocate some of your portfolio to your chosen fixed-income investments.

» MORE: How to choose a financial advisor

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Bottom line

Fixed-income investing is a good strategy for retirees and those with a low risk tolerance. It can help preserve your investment portfolio with less risk while still generating a solid return.

But not all fixed-income investments are a good idea, especially if you have a long investing time horizon. Bonds and other fixed-income assets typically underperform the stock market over a long period of time, and heavily investing in fixed income while you are younger may stifle your overall returns.

It’s a good idea to meet with a licensed financial advisor to review fixed-income investment choices for your investing goals.


Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. TreasuryDirect, "I bonds." Accessed Nov. 22, 2023.
  2. TreasuryDirect, "Treasury Bills." Accessed Nov. 22, 2023.
  3. TreasuryDirect, "Treasury Notes." Accessed Nov. 22, 2023.
  4. TreasuryDirect, "Treasury Bonds." Accessed Nov. 22, 2023.
  5. U.S. Securities and Exchange Commission, “Municipal Bonds.” Accessed Nov. 22, 2023.
  6. TreasuryDirect, "Tax information for EE and I bonds." Accessed Nov. 22, 2023.
  7. Federal Reserve Bank of Cleveland, "Why Does the Fed Care about Inflation?" Accessed Nov. 22, 2023.
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