We take three popular types as examples – treasury securities, corporate bonds and international bonds.
As explained in our (introductory) first article in these series, fixed income investments – as the name would suggest – are those that provide for periodic income that is received at regular intervals and at reasonably predictable amounts. They generally cater to investors who prefer the stability of relying on investments to provide a regular, stable and reliable income stream. One can look at them as investments that tend to balance one’s portfolio and reduce much of the volatility and uncertainty that is often associated with investing.
Fixed income investments focus around those that offer short-term, medium-term and long-term maturities. These include but are not limited to treasury securities, money market instruments, corporate bonds, asset-backed securities, municipal bonds and international bonds.
The primary risk associated with fixed-income investments is the possibility of the borrower defaulting on his payment. Other considerations include exchange rate fluctuations for international bonds and interest rate risk for longer-dated securities. Compared to other popular investment vehicles, these mediums offer relatively stable returns on investments.
These investments are commonly known to be the least volatile and relatively risk free (for the most part) with their tenures spanning the short, medium and long terms. They basically entail investments in treasury bills, notes and bonds. They are accessible and cater to investors of varying risk appetites – usually constituting part of a portfolio to add some form of stability.
Taking Singapore Government Securities as an example, these investments are backed by the government, drawing their stability from the fact that they come with guaranteed timely payments of interest on the bond and the principal payment on maturity. Investors should always know that the reliability of these securities depend largely on the government issuing them
These are issued by companies to raise funds for reasons that could cover expansion, assistance with ongoing operations as well as carrying out mergers and acquisitions. They do not represent an ownership interest in the company; investors are paid a rate of interest over a period of time and repay the principal at the maturity date established at the time of the bond’s issue. They too can fall under short, medium and long-term tenures.
Investors should also note that these bonds are gauged by credit rating agencies on their nature, basically if they fall under investment or speculated grade. Corporate bonds offer diversification and are highly liquid, which is part of their appeal. Risk wise, apart from the normal interest rate risk involved in bond investing, they depend on the success of the company – investors stand to lose when the company (borrower) fails to repay the loan and defaults on its obligation.
These usually act as supplementary investments to offer diversification for one’s portfolio, and involve foreign companies or governments issuing bonds sold to domestic investors. They pay interest in the currency of the issuing country and fluctuate based on the country’s economic conditions as well as foreign exchange rates between both regions.
As they assist in hedging against other currencies, international bonds also tend to be more volatile for obvious reasons. With good financial knowledge of the country one is investing in, such bonds have been found to deliver additional diversification, while maintaining a similar risk/return profile to that of traditional core fixed income.
The overall appeal of fixed income investments are obvious. They tend to be stable and predictable mediums in which to park one’s money for those who are risk adverse. As with any medium, investors should still be cautious and check such factors as credit ratings and track records before making any decision to invest.