Guide to Investing in Fixed-Income Instruments

Updated: July 5, 2024

An investment can do three things: preserve capital, grow capital, and/or provide 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, 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 ideal for those who are afraid to lose money but want to earn more than a regular bank savings account. They’re also a good place to put funds for 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 in this category.

Certificate of Deposits

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

These products provide you with fixed income through 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 they remain 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, you’re lending money to the government.

Government bonds are available in most commercial banks. They’re also known by various names, such as Treasury Bills, Treasury Notes, Treasury Bonds, and Government Securities.

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

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

Lastly, if 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. Unlike cash deposits and bonds, you won’t receive any interest income.

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, a mutual fund that invests only in government securities.

Many other UITFs and mutual funds only have fixed-income instruments in their portfolios.

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 soon, fixed-income instruments are the best place to park it until you need it.

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