| From an investor's perspective, the primary purpose of the fixed income asset class is to provide a low risk, reliable income stream and to preserve capital. Fixed income offers investors:
1.Capital stability
One of the key characteristics of most fixed income investments is the repayment of capital at maturity, or in some cases, over the life of the bond.. One of the lowest risk fixed income Fund is Liquidity Fund.
2. Regular income
Fixed income securities provide a regular income stream through coupon payments where the dates and amount of the coupon payable are defined at the time of issue. As a result, a portfolio of fixed income securities can be tailored to meet an investors' cash flow requirements (both size, and timing).
3. Diversification
Diversification spreads investment across a range of assets, maturities, and risks with the aim of reducing the impact of any one investment in a portfolio. Fixed income allows diversification away from the two most cyclical asset classes - equities and property.
Fixed income products can counter-balance higher risk investments in a portfolio and they can serve to even out returns in times of high volatility. Most, if not all, balanced investment portfolios should contain a significant fixed income allocation to ensure investors of their continued ability to meet ongoing business and personal commitments
4. Ability to earn better returns than bank deposits
Many investors use term deposits which provide minimal risk but generally earn relatively low returns. One of the many strategies investors can employ is to invest in other fixed income products offered by the same financial institution which may offer higher returns. By undertaking this strategy, the investor retains exposure to the same company (assured of its credit quality and ongoing viability) .
5. Ability to diversify the range of portfolio maturities
Bond maturities typically vary between one and ten years. In addition, bonds are tradable securities and can be sold before maturity. The investment return, when a bond is sold prior to maturity, may differ from the initial yield.
6. Liquidity
Cash is an important component in a portfolio. Investors with cash can use it to pay their bills and maintain their positions. Equally, very low risk and highly liquid fixed income investments such as government bonds can be sold at short notice if required. Liquidity is a fundamental factor in building a portfolio.
An important function of liquidity is being able to sell an asset quickly without significant loss. Assets that cannot be easily sold or traded in a secondary market need an appropriate return to compensate for illiquidity.
7. Protection against loss in a cyclical downturn
Generally, a fixed income allocation in your portfolio will act to protect it during a cyclical downturn. A greater allocation will provide greater protection. Setting your asset allocation and regularly rebalancing your portfolio, assuming a set fixed income allocation, should provide ongoing protection. |
