Fixed-income investments in Canada

Fixed interest or fixed income is an investment that offers regular set returns over a specified period of time. Unlike when you invest in stocks or most other kinds of investments, the idea of fixed interest is that your rate of return is known, and it doesn’t fluctuate or fall.

For this reason, fixed-income assets are often thought of as one of the safest forms of investing because you avoid the price fluctuations you’d typically get when investing in the stock market. Common fixed-income assets include government bonds, company bonds, cash and gold.

How to invest in fixed income

It’s important to understand that fixed income encompasses many different kinds of products. Even if a fund has labelled itself as being “fixed income” or “fixed interest”, it does not mean that your returns are guaranteed or that your money is safe from market volatility.

Fixed-income products also differ broadly in terms of risk and performance. While fixed-income products offered by the banks, such as term deposits, have a safety guarantee of up to $100,000, non-bank products broadly categorized as “investment funds” have no such guarantee and are regulated entirely differently.

Examples of products that are commonly classified as fixed-income investments are outlined in this guide below:

See below to read more about the different benefits and risks of fixed-income investing.

Peer-to-peer lending for investors

Peer-to-peer (P2P) lending platforms connect everyday borrowers with investors. Investors replace the banks to become lenders while borrowers sign up to the same platform to receive loans.

Investors benefit from loaning their funds through a P2P because they can get a higher return than they normally would by investing in a banking product. Plus, most P2P funds offer fixed returns over a period of several months or years, making these a potentially less volatile option than share-market investing or investing in other kinds of managed funds.

What are the pros?

• Fixed rate. When you invest in a P2P fund, you’re agreeing to a fixed rate of return. So long as the fund delivers on its promise, you’ll know what to expect at the end of the term.
• Higher returns. Most P2P funds offer higher interest-rate returns than bank products like term deposits or savings accounts.
• Potentially less risky. Although risk level varies enormously across P2P products, they tend to be less volatile than stocks and many are considered far safer.

What are the cons?

• No guaranteed return. Although you have the potential to get a higher return than you normally would with a term deposit or savings account, there’s the possibility of losing your money if a borrower defaults.
• Credit ratings. P2Ps sometimes categorize funds as low risk or high risk, but to date, there is no regulated standard across operators, which makes it difficult to compare funds.
• Exiting the fund. Like a term deposit, you’re locked into the fund for a set duration and you can expect penalties should you choose to exit before the term ends.

Invest in term deposits

A term deposit is a banking account in which funds are locked down for a specified period of time. In return, the issuing financial institution rewards you with interest on your money at an agreed-upon rate. It’s considered one of the safest options available to investors.

Because the interest rate is fixed, you know exactly how much your pool of money will have grown by at the end of the term. Once the term ends, you can withdraw the money or reinvest it. The down side is that if you choose to withdraw your funds early, there’s usually a cash penalty applied.

For more information on bank products, you can read our comprehensive guide to high interest savings accounts.

What are the pros?

• Fixed rate. You’re agreeing to a fixed rate of return, so you know exactly what you’ll get at the end of the term.
• Very low risk. There are few options safer for your money than a term deposit. There is no market volatility and little or no risk of losing your investment.
• Guaranteed protection. Term deposits through a bank are guaranteed by the Canada Deposit Insurance Corporation (CDIC) to the amount of $100,000.

What are the cons?

• Lower returns. The fixed-rate returns are typically lower than with other investment products.
• Exiting the fund. You’re locked into the fund for a set duration, and you can expect penalties if you choose to exit before the term ends.

Invest in bonds

When most people think of fixed interest, they think of the bond market. A bond is a contract where you lend money to a business or government. In return, the organization promises to pay you back at a fixed rate of interest.

Bonds are considered to be one of the safest assets you can invest in. So long as the organization issuing the bond doesn’t collapse, there’s little chance that you’ll lose your money. For this reason, government and blue chip company bonds tend to be a safe bet, but there are exceptions.

Investing directly in individual bonds can require a larger investment than buying bond funds or ETFs, depending on the bond and brokerage. Those looking to invest less can invest in bond mutual funds, bond ETFs or other fixed-income products.What are the pros?

• Fixed rate. When you invest directly in bonds, you know exactly what return you’ll get at the bond’s maturity rate.
• Low risk. Investment-grade bonds are considered one of the safest investment options available.
• Returns. The investment returns that you get from some bonds are higher than what you can expect from some term deposits or savings accounts.
• Regular income. When you invest in bonds, you receive income in the form of coupon payments on a regular basis.

What are the cons?

• Lower returns. Bonds typically offer lower returns than what you can potentially get from share trading and some investment funds.
• Exiting the investment. In most cases, you’ll be penalized for exiting before the maturity date.
• Minimum investment. Some individual bonds may have minimum purchase amounts, which can make them less accessible than bond funds or ETFs.

Fixed-income funds and ETFs

Today, there are many managed investment funds, listed investment trusts (LITs), listed investment companies (LICs) and ETFs that offer access to fixed-interest assets.

Investment funds are a portfolio of assets that can include shares, bonds, cash and derivative products. These funds are managed by a group of investment professionals who decide which assets the fund will hold or which index it’s tracking.

Some of these funds offer fixed income in the form of dividends, and others benefit from the rising demand for bonds or cash as an asset class. It’s important to understand that although they may hold fixed-income assets, they might not offer fixed-interest payments or maturity dates.

Investment funds come with different rules, requirements and risks that are at the discretion of the issuer. Many of these products are complex and require expert advice.

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What are the pros?

• Higher returns. There’s the potential to get a higher capital return than traditional bond investing.
• Liquidity. Funds listed on a stock exchange can offer high liquidity.
• Flexibility. Fixed-interest funds have options to suit a broader range of investors than direct bond investing as they can hold any number of securities.
• Cost. It’s possible to invest in bond funds for as little as a few hundred or thousand dollars.

What are the cons?

• May not have set return. Investment funds have their own rules around interest payments, and this may not be fixed as with other income products.
• Transparency. Investment funds, LICs and LITS may hold any number of assets, including risky derivative products, and these do not always need to be reported immediately. This means investors may not know exactly what they’re investing in.
• Uncertain return. There’s no guarantee that you’ll receive the return that you hope for as the fund’s value may fluctuate depending on market demand.

Invest in hybrid securities

Hybrid securities are contracts issued by companies, banks or insurers that have both debt and equity features. They may also be referred to as convertible bonds, capital notes, subordinated notes and convertible preference shares, depending on the contract and issuer.

Although these securities behave similarly to bonds, they can be far riskier and are sometimes classified as “growth products” rather than “fixed-income products”.

They typically work by paying interest to investors for a specified period of time, and they’re oftentimes listed on a stock exchange and traded like shares. This means the market price may be volatile and an investor risks losing money if it falls below the buying price.

Unlike bonds, there’s enormous flexibility on the issuer’s part, which can make the products riskier or complex for investors. For example, some hybrids allow the issuer to cancel the deal, suspend payments or convert the securities into shares as they choose.

What are the pros?

• High returns. As with other kinds of risky investments, there’s the potential to earn a higher return on investment than with bonds.
• Volatility. Their price is typically less volatile than shares.
• Income. Hybrids typically offer regular income payments that may include franking credits.

What are the cons?

• Unsecured investment. They may be unsecured, which means you risk losing your investment entirely should the company become insolvent.
• Market and interest rate volatility. If the fund falls below the price you paid for it, you risk losing money while interest rates changes can also impact the hybrid’s value.
• Liquidity. The market for hybrids is smaller than shares, which means it may be harder to sell for a competitive price if demand falls.
• Income not guaranteed. Investors may not be paid an income or have their payments deferred for months or years, depending on the contract. This may be due to legal changes, corporate losses or other reasons.

Frequently asked questions about fixed interest funds

• Are fixed-income investments safe in Canada?

  Fixed-income investments can provide more predictable returns than stocks, but they still carry risks. The level of risk depends on the investment, though. For example, GICs provide guaranteed interest, so they're generally considered low-risk, while bonds can lose value if interest rates rise or the issuer cannot repay the debt.

• What's the difference between a GIC and a bond?

  A GIC is an investment that pays a fixed interest rate for a set period. A bond is a debt investment issued by a government or company that can be bought and sold before it matures.

• How much of my portfolio should be in fixed income?

  The right amount depends on your investment goals, investment timeline and risk tolerance. Investors with shorter timelines or a lower risk tolerance may want to hold more fixed-income investments, while those with longer timelines may want less.

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Written by

Kylie Purcell

Senior investments editor

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Kylie Purcell is the senior investments editor at Finder. She has a background in business and finance news with previous roles at SBS, Your Money, TVNZ, Switzer Group and The Adviser magazine. Kylie has a Masters in International Journalism and a Graduate Diploma in Economics. When she's not writing about the markets you can find her bingeing on coffee. See full bio