Is the prospect of receiving 2% p.a. interest in a savings account or 3% interest in a term deposit sound enticing to you? What is a conservative investor to do?
Today’s low interest rate environment has forced many investors to seek alternative sources of income. Shares and property are popular and effective options, but these are primarily growth assets. If income is your primary goal you should consider fixed interest investments as part of your investment portfolio.
What is fixed interest investment?
With fixed interest investments, you are basically lending money to either a company or government. In return you receive regular interest payments for a set period of time until maturity when your principal is repaid. The amount you receive will generally be the same as the initial face value. The investment does not need to be held until maturity either, it can be sold on a secondary exchange such as the ASX before maturity, however in doing so, there is a risk that the market rate will differ to the face value.
Fixed income is an asset class which includes a broad spectrum of different assets, including;
- government bonds
- corporate bonds
- asset backed securities
- hybrid securities
Much like with any loan, the interest rate you receive is either fixed or variable (floating) rate. The interest rate you receive is very much a function of the risk you take on. On one end of the spectrum is Australian Government Bonds which provide a slight income premium to term deposits or you can take on a little more risk and large companies like CBA or QBE which will pay you a larger premium. On the other end of the spectrum are high yielding ‘junk’ bonds, which have the potential to pay high levels of income but there is a far greater risk to your capital.
Fixed-interest markets can be complicated, and traditionally, have been a market largely for institutional buyers. Don’t let that scare you away!
Recently, investors have gained access to Australian Government Bonds through the ASX, but for most retail investors Managed Funds are the best way to access fixed interest investments.
In buying a Managed Fund, you are buying units in a professionally managed portfolio of Fixed Interest investments. There are a plethora of Fixed Interest Funds out there, all with different characteristics to suit the income needs of different investors. The right fund can provide you with both steady income and stable capital.
If you are serious about building an all weather portfolio, you should seriously consider adding them to your investment portfolio.