This is the first article in a two-part series on investments that give regular returns. It provides a refresher on how investments can make money for you, and gives detail on the advantages of fixed income securities.
You can read Part 2 by clicking here.
Income from investments comes either from capital appreciation or from interest.
The former is when you put your money in an asset, wait for it to rise in value, then sell it for more money than you put in. The latter is when you put your money in an asset, wait for it to mature, then get your money back with interest – a repayment of sorts for investing in it.
Growing money through capital appreciation is not for the faint of heart and is usually intended for aggressive investors with investible money considered “spare money” rather than “savings.” That’s because there’s no guarantee when or if an investment will go up in value.
With capital appreciation, although there’s a chance you can grow your money at a fast rate, you also face the risk of losing a portion of or, in very rare occasions, all your money.
On the other hand, growing your money through interest income gives a bit of comfort. It is usually intended for passive investors on the more moderate to conservative side because the growth is somewhat more predictable, making the investment less risky.
There is still a degree of risk involved, of course, but less than capital appreciation. This is usually done through fixed income securities.
Fixed income securities
Fixed income securities entitle the investor to a stream of cash flows. There are a lot of ways in which a fixed income security can be structured, but for the purpose of this introduction, let’s stick to the two basic ones: coupon-paying and zero-coupon.
A coupon-paying fixed income security entitles the investor to periodic interest payments (commonly on a semi-annual or quarterly basis) until the security matures. Meanwhile, a zero-coupon fixed income security, usually with a term of less than 1 year, pays interest at the same time as the principal on maturity date.
In both cases, except for bank-issued time deposits, these securities can be sold to other investors, but the value can go up or down because of changes in general interest rates. Because it goes up or down in market value, it can be described as “Mark-to-Market (MTM).”
Read Part 2 here.