Fixed Income Portfolio
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 Capital Markets & Securities Analyst (CMSA)® certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:
