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What is Fixed Income? Why Invest in It?

29 Nov 2022

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Contents: 

Key Takeaways:

  • Fixed income typically carries less risk, making it a wise choice for capital appreciation
  • Dependable and timely payments are why fixed income is such a desirable asset
  • Most fixed-income securities are rated by credit rating agencies

When it comes to investing, there are many options to choose from. You can invest in more common financial instruments, such as stocks and mutual funds, or more complex financial instruments such as private equity and private funds depending on your investment goals. One option that is almost always in a savvy investor’s radar is fixed income security.

Favoured for its ability to generate a fixed rate of interest, fixed income security can be a wise choice for investors who have a moderate to low-risk appetite and would like to preserve their capital in uncertain times.

As to why this is, there are many reasons. However, before we get to that, let us first understand what a fixed income security is.

What is Fixed Income?

A fixed-income security is simply an investment that pays a set amount of money at regular intervals, known as interest or coupon.

The investor of this security receives a coupon payment (interest) until the security reaches maturity, at which point the investor will receive his or her final principal amount.

Examples of fixed income products include bonds, investment notes, private debt securities, etc.

Sounds simple?

As a matter of fact, its simplicity is exactly one of the reasons why many investors incorporate it into their existing portfolios, along with other investments.

Here are Other Advantages When Investing in Fixed Income Security

Diversification from Stock Market Risk

Fixed income assets are generally less sensitive to macroeconomic risks, such as inflation, recession, or geopolitical events. As such, it is broadly understood that they carry lower risk compared to stocks. By allocating a portion of your portfolio to fixed income investments, you can protect your portfolio against volatility in the stock markets.

Rated by Credit Rating Agencies

Most fixed-income securities are assessed and rated by credit rating agencies, enabling you to make informed choices when selecting financially stable issuers. In the case of KLDX, our fixed-income securities will be rated by an SC-licensed credit rating agency, which provides ratings on issuers of commercial papers, bonds, long-/short-term debts, and preferred shares.

Predictable Income

When you invest in fixed income securities, you will know exactly what your returns are and when you will be getting them. This helps to provide a regular, predictable stream of income.

To find out more on our fixed income security listings, visit our project listings page here. The coupon (interest), redemption (full repayment of the principal amount), and rating will all be clearly stated on the white paper of each business issuing these securities.

Who Can Invest in Fixed Income Securities?

Steady Income Seekers

Fixed-income securities are an ideal choice for steady income seekers who prioritise capital preservation and a predictable source of income. These securities are known for their lower risk profile compared to other investment options like stocks. Steady income seekers often prefer the stability and reliability that fixed-income securities offer, making them a crucial component of a balanced portfolio.

Retirees and Income-Seeking Individuals

Retirees and individuals seeking a reliable source of income to cover living expenses are prime candidates for investing in fixed-income securities. With regular interest payments and the return of the principal amount at maturity, these securities provide a steady cash flow, allowing retirees to maintain their quality of life without being overly reliant on market fluctuations.

Those with Short to Medium-Term Financial Goals

Fixed-income securities can be tailored to match different investment horizons. For individuals with short to medium-term financial goals, such as saving for a down payment on a house or funding a child’s education, fixed income products with corresponding maturities can provide a reliable means to achieve these objectives. The predictable nature of fixed-income securities makes them an effective tool for meeting specific financial milestones.

Key Considerations for Fixed Income Investors

Interest Rate Risk

Fixed-income securities have interest rate risk meaning the rate paid by the security could be lower than interest rates in the overall market. For example, let us just say you have invested in a fixed income that pays 7% per year. Over the years though, the rates have increased to 10%. This means your fixed income price and returns are now lower than what is currently being offered in the market.

Barriers to Entry

The minimum investment required for fixed-income securities in Malaysia can be relatively high, which may deter potential investors from accessing this widely accepted capital-preservation option.

KLDX changes all this. By leveraging blockchain and smart contract technology, we make fixed income investing accessible to all investor types for a low minimum investment.

Start investing now here

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