Guide to Investing in Fixed-Income Instruments

Updated: July 11, 2023

An investment can do three things: capital preservation, capital growth, and/or give regular income. This means it can protect the value of your money, significantly increase it, and/or provide cash flow respectively.

Investments can have other unique benefits, but all of them will definitely have one or two of these as their main feature. Additionally, an investment that can do all three very well does not exist. If you stumble upon one, then be careful, as it could be a scam.

Fixed-income instruments are investments that provide capital preservation and regular income. When you invest here, you minimize the effects of inflation on your money and, at the same time, receive a modest income on a fixed schedule.

Fixed-income instruments are low-risk investments that are ideal for those who are afraid to lose money but want to earn higher than a regular bank savings account. It’s also a good place to put your funds for your short-term goals.

So what are the different types of fixed-income instruments? And how do you invest in them? Here’s a list of the most common types that belong to this category.

Certificate of Deposits

Certificates of Deposits (CDs) are more commonly known as time deposit accounts. Some banks offer a similar product in the form of a high interest-bearing, special savings account.

These products provide you with fixed income in the form of interest payments from the bank. The rates are higher than a normal savings account, which makes it a good place to park a major portion of your emergency fund.

They won’t effectively protect your money against inflation, but it remains accessible because many commercial banks now allow withdrawals from a time deposit account with no penalty charges.

Government Bonds

Bonds are debt securities. When you invest in government bonds, it’s like you’re lending money to the government.

Government bonds are available in most commercial banks. It’s called by various names, too, such as Treasury Bills, Treasury Notes, Treasury Bonds, and Government Securities.

Investing in bonds will earn you the specified coupon rate (interest rate) over a fixed number of years, given on a regular schedule. After which, you’ll be paid back and receive your initial capital.

The average yield of 10-year Philippine Government Bonds from 2001-2018 stands at almost 8%, which is a pretty great number as it’s way above the average 4% inflation rate of the country for the same period.

Corporate Bonds

Similar to government bonds, big companies can also offer bond investments. The mechanics are the same. That is, you will earn a fixed amount over a specified length of time on a regular schedule.

Corporate bonds tend to offer higher coupon rates than government bonds. But they’re not always available, unlike Treasury Bills. You’ll have to wait for an announcement, usually in newspapers, to know which companies are offering bond investments.

Lastly, if ever the company closes and declares bankruptcy, you have priority over shareholders for the repayment when the company’s assets are liquidated.

Corporate bonds are also sometimes called Long-Term Commercial Papers.

And if you’re interested to learn more about bond investments, then you should read this: How to Invest in Bonds for Beginners

Low-Risk Investment Funds

Strictly speaking, an investment fund is not a fixed-income instrument. Particularly, you won’t receive any interest income, unlike cash deposits and bonds.

However, it is included in the list because there are a lot of investment funds that focus on fixed-income instruments.

For example, the BPI Short Term Fund is a Unit Investment Trust Fund (UITF) that invests in short-term government securities, money market securities, and other highly marketable fixed-income instruments.

Meanwhile, Sun Life Financial has the GS Fund, which is a mutual fund that invests only in government securities.

There are many other UITFs and mutual funds that only have fixed-income instruments in its portfolio.

Investing in Fixed Income Instruments

These types of investments give stable and predictable returns. It’s recommended for everyone to have this type of investment.

Particularly, if you have cash that you intend to use within the near future, then fixed-income instruments are the best place to park your money until you need it.

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