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Fixed-income investments for a safer nest egg

Compare bonds, managed funds, CDs and trading platforms.

Updated

Fixed income investments are a lower-risk way to save and grow your money. But lower risks can mean slower growth.

What is a fixed-income investment?

Fixed-interest or fixed-income investments can offer consistent returns over a set period of time. They come with predictable returns, minus the worry of rate or market fluctuation.

For this reason, fixed-income assets are considered some of the safest ways to invest because you avoid the price fluctuations you’d typically get when investing in the stock market. Common fixed-income assets include:

  • Interest-bearing bank accounts
  • Government or company bonds
  • Peer-to-peer loans
  • CDs
  • Mutual funds and ETFs
  • Hybrid securities

What are the risks?

Fixed-income investments are generally less risky than stocks. Some fixed-income products that banks offer — namely CDs — are protected by the government up to $250,000, just like savings accounts. Most other types of fixed-income investments are types of loans, so the risk depends on who’s paying you back. If it’s the federal government, history will tell you you’re about as safe as it gets.

But when you get to peer-to-peer loans or bonds from smaller companies, investors typically begin to factor in a portion of their investment that may end up with a company that defaults on its loan and can’t pay it back. These high-risk bonds are often referred to as “junk bonds,” and they pay the highest yields in order to compensate investors for taking that risk.

Due to the risk of default, returns on bonds are fixed but not guaranteed. However, bonds are legally binding contracts. So in the event of a company bankruptcy, bond investors will get paid before stock investors. Oftentimes, bond investors only get a portion of their original investment back from a bankrupt company.

How to invest in fixed-income investments

There are many ways to invest in a fixed income investment. Once you choose your investment — CD, government bonds or ETF, for example — find out where it’s offered. While many fixed-income investments are obtained through banks, you can also access them through:

  • Direct source like the US Treasury or state government websites — government bonds
  • Mutual fund issuer like Vanguard or T. Rowe Price — CDs, bonds, mutual funds, ETFs
  • Brokerage account like Fidelity or TD Ameritrade — bonds, ETFs, mutual funds, hybrid securities, CDs, real estate investments
  • Marketplace like LendingClub or Prosper — peer-to-peer loans

To invest, open an account, transfer the money or place the trade.

Bonds

  • Where to find them: Brokerage account or direct from the US Treasury.

    The most popular kind of fixed-interest accounts are bonds. A bond is basically a loan to a business or the government. In return, the organization promises to pay you back interest at a fixed rate.

    Bonds are one of the safest assets you can invest in. As long as the organization issuing the bond doesn’t collapse, there’s little chance you’ll lose your money. The safest bonds come from government and blue-chip companies.

Risks

  • Exiting the investment. In most cases, you’ll be penalized for exiting before the maturity date.
  • High investment. Bonds typically require a minimum investment of around $500,000.
  • Lower return than other investments. You’re more likely to get a higher return with stock trading and investment funds due to their higher levels of risk.

Compare platforms to invest in bonds

Name Product Available asset types Stock trade fee Option trade fee Annual fee
Worthy
Bonds
$0
0%
Earn a 5% fixed return on bonds that support American small businesses.
Zacks Trade
Stocks,Bonds,Options,Mutual funds,ETFs,Forex,Cash
$1
$1 + $0.75/contract
0%
Trade stocks, options and ETFs for as low as $1 per order for a year when you open a new account by December 31, 2019, and fund it with $2,500 or more within 60 days.
TradeStation
Stocks,Bonds,Options,Mutual funds,ETFs,Futures
$5
$5 + $0.50/contract
$99.95 per month
A platform built for all kinds of traders and all styles of trading
loading

Compare up to 4 providers

Peer-to-peer (P2P) lending for investors

  • Where to find them: Various P2P marketplaces.

    P2P lending platforms connect everyday borrowers with investors. Investors replace banks as lenders, while borrowers sign up to the same platform to receive loans.

    Investors benefit from lending on a P2P because they can get a higher return than keeping their money in an account. Plus, most P2P funds offer fixed returns over several months or years, making these a potentially less volatile option than stock market investing or investing in other kinds of managed funds.

Risks

  • No guaranteed return. Although you have the potential to get a higher return than you normally would with a CD 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 there’s no regulated standard, which makes it difficult to compare funds.
  • Exiting the fund. Like a CD, you’re locked into the fund for a set time and you can expect penalties if you exit before the term ends.

CDs

  • Where to find them: Bank or brokerage account.

    A CD locks up your funds for a set time. In return, the bank pays you interest on your money at a preset rate once the term is up. It’s considered one of the safest options available to investors. Because the interest rate is fixed, you know exactly how much money you’ll make. Once the term ends, withdraw the money or reinvest it.

Risks

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

Fixed-income mutual funds, ETFs and real estate investment trusts

  • Where to find them: Brokerage account or mutual fund issuer.

    Today, many bond mutual funds, ETFs and real estate investment trusts (REITs) offer access to interest-bearing assets. An issuer directly sells bond mutual funds, while investors can buy ETFs and REITs in a mainstream stock trading account by using a ticker symbol.

    Bond fund and ETF prices still fluctuate in the market, but their volatility tends to be less than stocks. There’s potential to get a higher capital return than with bond investing, plus flexibility to reach more investors with the possibilities of smaller investments.

Risks

  • May not have set return. Investment funds have their own rules around interest payments, and this may not be fixed like other income products.
  • Transparency. Mutual funds and ETFs may hold any number of assets, including risky derivative products, and these don’t 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.

Hybrid securities

  • Where to find them: Brokerage account.

    Hybrid securities are contracts issued by companies, banks or insurers that have both debt and equity features. They include investments such as convertible bonds, convertible preferred stock, capital notes and exchange-traded notes (ETNs). Although these securities behave similarly to bonds, they can be riskier and are sometimes classified as “growth products” rather than “fixed-income products”.

    They typically work by paying interest to investors for a preset time, and they’re often listed on a stock exchange and traded like stocks. This means the market price may be volatile and investors risk losing money if it falls below the buying price.

    Unlike bonds, there’s enormous flexibility for the issuer, making the products riskier or more complex for investors. For example, some hybrids allow the issuer to cancel the deal, suspend payments or convert the securities into stock when they want.

Risks

  • 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 rate changes can also impact the hybrid’s value.
  • Liquidity. The market for hybrids is smaller than for stocks, 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 may have their payments deferred for months or years, depending on the contract. This may be due to legal changes, corporate losses or other reasons.
Disclaimer: The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.

Bottom line

If you’re looking for a low-risk way to invest, choosing an option with a fixed interest rate may be for you. But if you’re looking for a balanced portfolio with both high- and low-risk investments, compare other investment options to learn more about which combination best suits you.

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