Guide to Fixed-Income Investing

ByNathan Paulus
Edited byRae Osborn

Updated: March 15, 2024

ByNathan Paulus
Edited byRae Osborn

Updated: March 15, 2024

Advertising & Editorial Disclosure

Fixed-income investments are important for balancing risk and returns, helping diversify portfolios across stocks and bonds. Stocks come with higher risk and potential returns, whereas fixed-income investments like bonds offer safety with lower returns. They have lower volatility and provide a steady cash flow. Before exploring fixed-income products, understand these instruments' nature, risks and rewards for more informed investing.

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What Is Fixed-Income Investing?

Fixed-income investing refers to investments that offer regular, set payments until a set date, known as maturity. This usually involves bonds, which are essentially loans you give to entities like governments or companies. In return, they pay you interest at a fixed rate and give back your initial investment when the bond matures.

Fixed-income products differ from equities, where dividends or your earnings aren’t guaranteed and can change based on interest rates. Remember, the money you earn from fixed-income investments are subject to income tax, although the specific tax implications may vary.

Types of Fixed-Income Investments

The most common types of fixed-income investments are government bonds and corporate bonds, but you also have other options like Certificates of Deposit (CDs) and money-market funds. Each option has distinct features and risks. Select a product that aligns with your investment goals, risk tolerance and desired returns.

US Government Debt (Treasuries)

United States Government Debt, also known as Treasuries, are among the safest investment options. They are fully backed by the U.S. government, making them a secure investor choice. These come in different types:

  • Treasury Bills (T-bills): These are short-term investments that mature in a year or less. They're typically sold in amounts of $1,000 and are a good option if you're looking for a quick investment.
  • Treasury Notes (T-notes): These are medium-term securities with maturities ranging from two to ten years. They offer interest payments every six months and return the principal upon maturity.
  • Treasury Bonds (T-bonds): These are long-term securities with 20 to 30 years maturities. Similar to T-notes, T-bonds provide semiannual interest payments and return the principal at maturity.
  • Treasury Inflation-Protected Securities (TIPS): TIPS are designed to protect against inflation. They change in value based on the Consumer Price Index and pay interest twice a year on the adjusted principal.

Municipal Bonds

Municipal bonds, issued by local governments to finance public projects, often offer interest exempt from federal taxes, and sometimes state and local taxes. There are two main types: general obligation bonds, backed by the government's power to collect taxes, and revenue bonds which are funded by specific project revenues, such as tolls from a bridge or income from a public utility. While general obligation bonds are typically safer, revenue bonds provide a unique opportunity to invest in specific community projects with varying risk levels.

Corporate Bonds

Corporations issue these bonds to raise money. Corporate bonds typically provide higher returns than government securities but carry a higher risk, depending on the financial stability of the company issuing them.

Bank Certificates of Deposit (CDs)

Certificates of Deposit are time-bound deposits offered by banks with a fixed term. They usually offer higher interest rates than regular savings accounts and are FDIC-insured up to specified limits. Early withdrawal from a CD can result in penalties.

Money-Market Funds

Money-market funds are mutual funds that invest in short-term, high-quality debt instruments. They strive to maintain a stable value and pay dividends that mirror current short-term interest rates. They are generally considered low-risk investments, though they are not insured by the FDIC.

Advantages and Risks of Fixed-Income Investments

Fixed-income investments attract those seeking stable returns ideal for diversification and capital preservation, particularly appealing to investors on a fixed-income or prioritizing savings. However, they also carry interest rate sensitivity, credit risk (the chance that the issuer won’t repay), inflation impact and liquidity challenges (difficulty in quickly converting to cash). Weigh these factors to help you decide if fixed-income investing is right for you.

Advantages of Fixed-Income Investments

Fixed-income investments offer a range of benefits, combining aspects of stability, income generation and risk mitigation. Key benefits include:

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Risks of Fixed-Income Investments

Fixed-income investments also come with certain risks you should be aware of:

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How to Get Started With Fixed-Income Investments

You can start with fixed-income investments either directly or through funds that include these types of assets.

1
Direct Investments

This involves buying fixed-income securities like bonds directly. It gives you more control over your investments but requires a good understanding of the market. You can purchase these securities through TreasuryDirect.gov or brokerage accounts, which also offer access to a broader range of bonds, including municipal, corporate and international bond options. Be aware of specific platform requirements and any associated dealing fees, particularly for new-issue Treasury securities.

2
Investing Through Funds

Funds, such as mutual funds or ETFs (Exchange-Traded Funds), include a mix of fixed-income assets managed by professionals. Investing through funds offers diversification and reduces the need for active management. This approach can be less time-consuming but typically involves higher management fees and carries different risks than direct investing.

WHAT TO CONSIDER IN FIXED-INCOME INVESTING

When considering an investment, it's helpful to focus on a few key factors:

  • Interest Rates: Assess the interest rates of different fixed-income products.
  • Payment Schedule: Understand the frequency and timing of income payments.
  • Maturity Dates: Know when the principal investment becomes accessible.
  • Repayment Probability: Evaluate the likelihood of full repayment.

Your investment decisions should be based on how long you plan to invest and how often you want to receive income. Once you identify your needs, you can invest and count on those regular interest payments to support your expenses or other financial plans.

Fixed-Income Investing Strategies

A strategic approach involving careful risk assessment and alignment with your financial goals may help boost your returns. We outline some practical strategies below:

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Additional Resources

These resources, ranging from investment education platforms and regulatory authorities, offer valuable insights for fixed-income investing.

  • BetterInvesting: This organization provides educational resources tailored for individual investors, focusing on enhancing their understanding and skills in fixed-income investing. It's a valuable tool for those looking to deepen their investment knowledge.
  • CFA Institute: Recognized globally, the CFA Institute offers comprehensive educational materials and prestigious certifications for financial analysts. It's a go-to source for professionals seeking advanced knowledge and credentials in finance.
  • FDIC BankFind Suite: This tool helps users locate federally insured banks, offering insights into their services. It's useful for managing and investing funds securely, ensuring protection under federal insurance.
  • Financial Industry Regulatory Authority (FINRA): As a regulatory body, FINRA oversees securities transactions, ensuring fair play. It also provides various investor resources, aiding in informed investment decisions.
  • Investor.gov: This platform offers a broad overview of investment options, providing a comprehensive guide for novice and experienced investors. It's an essential resource for understanding different investment avenues.
  • National Financial Educators Council (NFEC): NFEC focuses on developing financial education programs, including resources specifically for fixed-income investing. It's instrumental in promoting financial literacy across various demographics.
  • SEC's Office of Investor Education and Advocacy: Operated by the U.S. Securities and Exchange Commission, this office offers resources and tools to educate and assist investors.

About Nathan Paulus


Nathan Paulus headshot

Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy.

Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.


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