Whether you’re focused on diversifying your portfolio, preserving your capital, or generating income, fixed-income securities could make a valuable addition to your financial plan.

Here are all of the basics you need to know about these investments.

What Is Fixed Income?

Fixed income is an investment approach that gives investors a steady income stream. Investors lend money to companies or governments and, in exchange, receive fixed interest payments. Once the fixed-income security reaches its maturity date, the borrower repays the investor the principal amount.

Let’s say you purchased a bond for $100,000 with a 2.5% interest rate. You would receive $2,500 each year. If the bond matured for 20 years, you would end up with $50,000 on top of your initial $100,000 investment.

Types of Fixed-Income Investments

Municipal bonds: State and local governments issue municipal bonds, a type of debt bond, to fund public work projects, such as roads, schools, and libraries. Maturities are typically between one and ten years, and any interest earned from these bonds is exempt from federal taxes.

Corporate bonds: Similar to municipal bonds, corporate bonds are issued by companies to raise funding for various projects. These bonds are classified by their maturities: short-term (less than three years), medium-term (four to 10 years), and long-term (more than ten years). Unlike stocks, bonds give you no equity in the company. You will always receive a fixed interest rate no matter how high or low stock prices go.

Certificates of deposit (CD): A CD is issued by banks and credit unions. The investor leaves a deposit for a specific period (no more than five years). In return for their deposit, the bank pays interest to the investor. After the term ends, the bank returns the initial deposit amount to the investor.

Treasury bills: A common money market fund, treasury securities are short-term investments that mature after one year. Rather than receiving regular interest payments, the investor purchases the treasury bills for lower than their face value. Once they mature, the investor gets the total face value. The interest, in this case, would be the difference between the face value and purchase price.

Should You Invest in Fixed-Income Securities?

Here are some top reasons fixed-income securities may make a beneficial addition to your investment portfolio.

Steady stream of income

Because interest rates are locked in and paid out regularly, fixed-income securities give investors reliable income. This can be especially useful for individuals approaching retirement, needing to create a new source of regular income, and hoping to minimize any capital losses.

Lower portfolio risk

Although they typically offer higher returns, stocks can quickly fluctuate in price, leading to notable gains or losses. Conversely, fixed-income investments offer lower returns but are less sensitive to stock market fluctuations, making them popular among conservative investors looking to diversify their portfolios and offset higher-risk investments.

Government guarantees

Government bonds and treasury bills come with guarantees that make them particularly low-risk investments. The U.S. government backs Treasury bonds and bills, and the Federal Deposit Insurance Corporation (FDIC) insures certificates of deposit up to $250,000.

Note: Corporate bonds carry slightly higher risk because they are not insured like government securities. Instead, they are backed by the company that issues them. Should the company go bankrupt, it may default on interest payments. However, it would still have to pay back bondholders before common shareholders.

Capital preservation

Capital preservation is a conservative investment strategy that prioritizes security and risk aversion over generating high rates of return. When you invest in certain bonds or CDs, your principal will be returned to you, making fixed-income securities a valuable capital preservation tool.

Want to learn more about how fixed-income securities fit into your financial plan? Ironwood Wealth Management is here to find the investment strategy that aligns with your risk tolerance and helps you achieve your financial goals. Contact us today to get started.