Fixed Income Funds
A fixed income fund is a fund that invests in interest-bearing securities, e.g. bonds and treasury bills. They are associated with low risk, but this, in turn, means that fixed income funds usually give a very low return.
By Viktor, co-founder of Bifrost - Mar 20 2019
A fixed income fund is a fund that invests in interest-bearing securities, e.g., bonds and treasury bills.
They are associated with low risk (and are therefore often used when you want to preserve the capital you have), but this, in turn, means that fixed income funds usually give a very low return.
Thus, fixed income funds are safer than, for example. equity funds, which generally have a significantly higher risk (and which therefore give a higher expected return).
However, it is worth noting that fixed income funds can have an increased risk depending on the type of fixed income fund you choose and how the interest rate climate in the economy looks like. But in general, fixed income funds are considered an investment alternative with (very) low risk.
What types of fixed income funds are there?
Different fixed income funds invest in interest-bearing securities with varying maturities, and thus they are suitable for different investors, depending on how long the investor has intended to own the fund.
A short-term fixed income fund places the money in securities with a maturity that is less than five years. This type of fixed income fund is most suitable for short-term investments because the interest rate changes on the market affect the fund's value relatively little. It is reminiscent of a regular savings account and thus has very low risk.
An intermediate-term fixed income fund invests in securities with a maturity that is between 5 – 10 years. The risk level is between the long- and short-term because it is more sensitive than a short-term fund but less than a long-term fund.
A long-term fixed income fund invests in securities with a maturity that is longer than ten years. This type of fixed income fund is most suitable for longer-term savings as the interest rate changes affect the fund's value to a greater extent. The risk level is relatively low, but it is somewhat higher than for short-term fixed income funds, as the value of the fund may fluctuate slightly more.
Should one only have fixed income funds in his portfolio?
If you are a cautious investor who does not want to take such a high risk in your investments, you should have a large proportion of fixed income funds in your portfolio, as these funds are associated with very low risk. But then you should also be aware that it will most likely give you a very low return as well.
However, if you are prepared to take a slightly higher risk and have a long-term savings horizon (preferably at least five years), it may be a good idea to also have equity funds in the portfolio - to increase the expected return.
A good combination is to have both equity funds and fixed income funds in the portfolio.
Important things to consider with fixed income funds
You will not get a particularly high return if you own fixed income funds, but on the other hand you will not lose so much because there is very low risk in this type of fund.
However, a long-term investor should keep down the share of fixed income funds in their portfolio, as they, as mentioned, give a low return. When investing in the long-term, it is a wise idea to have equity funds because they have a higher expected return over time, which means that the compound effect will do wonders for your performance.