Investment securities that pay a fixed interest until its maturity date
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What is a Fixed Income Portfolio?
A fixed income portfolio comprises investment securities that pay a fixed interest until their maturity date. Upon maturity, the principal amount of the security is paid back to the investor.
Some examples of fixed income securities are:
- Certificates of deposit (CDs)
- Government-issued bonds
- Corporate-issued bonds
- Treasury bills
- Bond mutual funds
Summary
- A fixed income portfolio comprises investment securities that pay a fixed interest until its maturity date. Upon maturity, the principal amount of the security is paid back to the investor.
- The fixed income investing strategy basically focuses on generating returns off of low-risk securities with a fixed (known or certain) interest rate.
- A fixed income portfolio comprises certificates of deposits (CDs), Treasury bills, bonds, and mutual funds, which are typically low-risk securities with an ascertained interest.
What is Fixed Income Investing?
The fixed income investing strategy basically focuses on generating returns off of low-risk securities with a fixed (known or certain) interest rate. A fixed income portfolio comprises certificates of deposits (CDs), Treasury bills, bonds, and mutual funds, which are typically low-risk securities with an ascertained interest.
Fixed Income Investing Strategies – Types
1. Laddered bond portfolio investing
The laddered bond portfolio investing strategy, commonly referred to as bond ladder investing, focuses on diversifying the portfolio by purchasing fixed income securities with different maturity dates in a ladder-like fashion, i.e., low to high rung-like fashion.
The diversified portfolio helps mitigate risk and benefit off of short-term bonds one at a time as and when they mature, then reinvesting the principal in higher-rung bonds. It ensures increasing returns and a profitable investment portfolio.
2. Bullet bond portfolio investing
Commonly referred to as bullet investing, the bullet bond portfolio investing strategy requires building a portfolio by purchasing fixed income securities at different dates but with the same maturity date. It diversifies the investment portfolio and, at the same time, ensures a future “bullet” of profitable returns.
The bullet investing strategy is generally adopted by investors who may need large amounts of funds in the future. It may be to fund a college education, pay for a wedding, purchase a large property, and many others.
3. Barbell bond portfolio investing
Barbell bond portfolio investing, commonly referred to as barbell investing, is a fixed income investing strategy that requires building a portfolio with two extremes, i.e., short-term and long-term bonds without intermediate bonds. The key fundamental factor behind the barbell investing strategy is to pay close attention to the short-term bonds of the portfolio and keep rolling them into new issues upon maturing.
Short-term bonds for a barbell portfolio are with a maturity of less than or equal to five years, and long-term bonds mature in ten years or higher. The strategy requires active management as one needs to focus on the short-term bonds to efficiently keep rolling them into new issues upon maturity.
Fixed Income Securities – Benefits
A portfolio primarily consisting of fixed income securities is beneficial in a number of ways, including:
1. Diversification
Building a portfolio essentially with fixed income securities brings diversification to the table. Diversification is a high priority characteristic that one needs to keep in mind when building their portfolio. It is especially true when the market is highly volatile and uncertain, with prices going up and down drastically.
Diversification helps bring resilience to the investment portfolio against such volatility and price corrections. It creates a sense of balance wherein if one section of the portfolio suffers, the portfolio is diverse enough to cover up the slack by having another section of high-performing securities.
2. Fixed income
The term “fixed income” securities provides some insight into why a portfolio that consists mainly of fixed income securities is preferred. Fixed income securities not only pay dividends and provide good returns but also offer a steady stream of income.
3. Risk level
Compared to equities, fixed income securities generally come with relatively lower exposure to risk. For the most part, it involves “default risk,” which is when the issuer of bonds is not able to meet their financial obligations.
Related Readings
CFI is the official provider of the global certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:
- Investing: A Beginner’s Guide
- Mutual Funds
- Default Risk
- Investment Portfolio
- See all fixed income resources
FAQs
Many financial advisors recommend a 60/40 asset allocation between stocks and fixed income to take advantage of growth while keeping up your defenses.
How to analyze a fixed income portfolio? ›
Perform granular analysis by decomposing a bond's total return into core elements including price, coupon, paydown, and currency, with the option to further decompose price. Measure the excess return of portfolio securities over equivalent government bonds.
What is a portfolio in fixed income? ›
A fixed income portfolio comprises investment securities that pay a fixed interest until their maturity date. Upon maturity, the principal amount of the security is paid back to the investor. Some examples of fixed income securities are: Certificates of deposit (CDs) Government-issued bonds.
How do you optimize a fixed income portfolio? ›
Portfolio optimization is an algorithmic engine that identifies optimal buys and sells across multiple portfolios; it should solve for a specific objective while also taking investor preferences – including portfolio strategy, investment targets, compliance rules, and client requests – into account.
Does Warren Buffett own bonds? ›
It seems that Buffett has softened his stance. Berkshire Hathaway's portfolio includes a significant amount of short-term bonds, despite its leader's infamous public position.
What is the 5% portfolio rule? ›
The 5% rule says as an investor, you should not invest more than 5% of your total portfolio in any one option alone. This simple technique will ensure you have a balanced portfolio.
What is a realistic portfolio return? ›
• A good return on investment is generally considered to be around 7% per year, based on the average historic return of the S&P 500 index, adjusted for inflation.
How to structure a fixed income portfolio? ›
For liability-based fixed-income mandates, portfolio construction follows two main approaches—cash flow matching and duration matching—to match fixed-income assets with future liabilities. Total return mandates are generally structured to either track or outperform a benchmark.
What is the fixed income fund strategy? ›
Fixed income investing focuses on capital protection in volatile markets. Compared to other stocks, this strategy allows a steady income stream with less risk. Typically, you would see this investment strategy in corporate bonds, government, money market funds and CDs.
How to live on a fixed income? ›
First and foremost, creating a detailed budget is the key. Start by listing all your income sources, including pensions, Social Security, required retirement account distributions, or any other fixed payments. Next, prioritize essential needs such as housing, utilities, transportation, groceries, and healthcare.
Money managers can hedge that duration risk by shorting bonds or using futures — options and other derivatives to target a lower duration than what the portfolio currently has. The downside to hedging is that the yield from the hedged portfolio could be slightly less because of the costs of the hedge.
What is an example of a fixed income? ›
Treasury bonds and bills, municipal bonds, corporate bonds, and certificates of deposit (CDs) are all examples of fixed-income products.
What is the core fixed income strategy? ›
The strategy pursues total return consisting of income and capital appreciation and aims to deliver consistent excess returns relative to the Bloomberg U.S. Aggregate Index.
How do you diversify a fixed income portfolio? ›
Strategies for diversifying fixed income assets
- Anchor. Anchor your portfolio with high-quality bonds. Investors are often tempted to time markets as market dynamics change. ...
- Non-core. Explore non-core income options. ...
- SHORT. Use short-term bonds to help lessen interest rate sensitivity. ...
- Municipal. Add municipal bonds.
Maturity timeframe
Traditionally, longer-term bonds produce higher yields but also have higher interest rate risk—the risk that the value of a bond will fall if interest rates rise. Thus, your time frame may be one factor in determining the amount of interest rate risk you're willing to take on.
How much of your income should be fixed? ›
50% of your net income should go towards living expenses and essentials (Needs), 20% of your net income should go towards debt reduction and savings (Debt Reduction and Savings), and 30% of your net income should go towards discretionary spending (Wants).
What is the 80 20 rule investment portfolio? ›
Investing. When it comes to investing, the 80/20 rule asserts that 80% of your investment returns — or losses — come from only 20% of your assets.
What is a 70/30 investment strategy? ›
This investment strategy seeks total return through exposure to a diversified portfolio of primarily equity, and to a lesser extent, fixed income asset classes with a target allocation of 70% equities and 30% fixed income. Target allocations can vary +/-5%.
How much of my portfolio should be in CDs? ›
CDs reside as cash investments in the cash part of your portfolio, intended to be safe and used for goals within several years. Long-term investors may decide to have a small percentage — such as 5% — of an overall portfolio in cash investments, which can include CDs and Treasury bills and notes.
