Fixed income investments like bonds and time deposits pay a set amount of money at a pre-determined schedule. Unlike assets with higher potential volatility like stocks, your profit will likely stay largely the same instead of frequently going up and down.
Though you’ll enjoy relative stability, this often comes at the cost of a comparatively limited earning potential. To know if the risk-return tradeoff is worth it, learn the 3 scenarios where fixed income assets might be ideal.
1. You want steady, predictable income
Income investing involves putting money in assets that offer regular and predictable earnings. Bonds, for example, typically pay a fixed interest on a quarterly or semi-annual basis.
Due to the scheduled payments, bonds are among the top options for those who want to employ an income strategy. This method is particularly helpful if you’re seeking to supplement your current sources of money or want to keep earning a stable amount after retirement.
2. Safety is a priority
There may be times when it’s more important to keep your money safe than to maximize its growth. Safety might be a priority if you have a low risk tolerance, you’re nearing retirement, or you’re planning to take money out of investments soon.
Even aggressive investors may seek protection during tough economic times. Fixed income assets may help balance out the higher-risk assets in your portfolio, especially if the volatile ones are facing a downturn.
Take note that some types of fixed income investments offer more safety than others. For example, government bonds are seen as less risky since the government is unlikely to default on its debt except in extreme cases.
Meanwhile, time deposits are covered by the Philippine Deposit Insurance Corporation (PDIC) under certain conditions. This means you’ll get part of or all your deposit back even if the bank closes.
3. Interest rates are high
Generally, when interest rates are high, certain fixed income investments become more appealing. They tend to offer higher returns as interest rates rise.
For example, if rates increase, it may be a good time to buy newly issued bonds since they’ll pay more in interest than older ones.
However, this also means that if interest rates keep going up, you’ll be locked into a lower coupon rate, and you might miss out on better returns from the latest bond issuances.
Changing interest rates may not matter much if you’re OK with a bond’s fixed rate and plan to hold it until maturity instead of trading on the secondary market.
Keep in mind that under the umbrella of fixed income assets, there are many different kinds that have their own features and potential up- and downsides.
Consider these unique characteristics to find options that match your situation and align with your priorities.
