Although fixed-rate securities have been part of the financial system for decades, thousands of investors fail to recognise to use of fixed-income securities in their investment portfolio. Fixed-rate income options, such as bonds, are commonly used to diversify an investor’s portfolio, as they reduce the level of overall risk that heavily rely on stock options.
Fixed-rate income options, such as corporate bonds, provide investors with a unique set of benefits they can rarely find in any other stock option. While this is the case, many investors fail to recognise the benefits of fixed-rate investments in their investment portfolio. This article looks to explore the finer details of fixed-rate investments and why investors should consider employing such an investment option, especially in times like these.
What are fixed-rates investments?
Fixed income investments focus on providing the investor with a reliable stream of income. Although they can take shape in many formats, the most common fixed-income investments usually take shape in the form of bonds (corporate or government-issued). A bond issuer will issue bonds as a form to raise money. In essence, they are a loan and the bond issuer will pay investors a fixed rate of interest to the investor for a set period, at the end of which the loan is repaid.
While investing in individual bonds can be particularly risky, the majority of investors will opt to put their money into highly-diversified income trusts that invest in bonds on behalf of the investor. When investing in a considerable number of bonds, fixed-income investments are generally considered less risky than shares, with income from bonds paid out before any dividends on shares, and bond pay-outs are taking over shareholders in the case of insolvency.
But why should an investor incorporate fixed-rate investments?
In such an unpredictable market, fixed-rate investments provide investors with a sense of security and an option to manage the risk of their investment portfolio. Fixed-rate investments are often used as a method to diversify an investment portfolio that focuses considerable weight on investment assets which are at the mercy of the stock market and external factors.
One of the greatest benefits and reason for inclusion is the stability it provides investors that arises from a stable portfolio balance which fixed-rate investments encourage. Fixed-rate investments through necessity are required to repay the original investment, in full by an outlined date in the future, or in dividends spread out during the life of the bond.
When a fixed-rate investment is highly rated, there is minimal risk that the organisation offering the fixed-rate investment will be unable to repay in full when the investment matures of finishes. Similarly, if you’re fixed-rate investment originates at a financial institution, your investment will often be safeguarded.
In addition to the stability and risk management properties, they provide an investment portfolio, fixed-rate investments provide investors with a steady stream of income. Bonds, preferred stocks and other fixed-rate investments, all pay a steady dividend and interest payments to investors throughout their ‘life’. Usually, when a fixed-rate investment is purchased, the investor will be able to benefit from the knowledge of the specific interest or dividend rates. It is these payments which should be guaranteed as long as the issuing entity does not default.
It is important to note that the likelihood of the fixed-rate investment defaulting ultimately depends on the issuer. For example, a government bond will be significantly less likely to default than a corporate counterpart.
Likelihood to repay
Fixed-rate investors significantly benefit from the financial structure they sit it, in terms of both equity and debt investments. Investors in bonds of a corporation have priority over other traditional stakeholders of the same company if that company defaults.
Investors are, therefore, in a position, where they will be more likely to be repaid their principal investment when assets are potentially liquidated.