As we continue to try and reap the opportunities that 2014 present, we are pleased to present an understanding of Fixed Income Securities, an instrument that provides fixed periodic payments and returns.
We hope that these insights will provide you with a deeper understanding of this instrument, which could form a part of your portfolio of investments and thus benefit from them.
Director, Brand & Communications
UNDERSTANDING FIXED INCOME SECURITIES
A fixed income security is a debt instrument issued by a government, corporation or other entity to finance or expand their operations.
Fixed income securities provide investors a return in the form of fixed periodic payments (usually annually or twice yearly) and the eventual return of principal at maturity. Unlike a variable income security, where payments change based on some underlying measure such as short-term interest rates, the payments of a fixed income security are known in advance.
The maturity period for fixed income investments can range anywhere from 3 to 15 years or more. In most cases, longer maturity periods will yield higher annual returns. It is important to note that bonds can be purchased directly from the issuer or on the secondary market.
| An example of basic fixed income security would be a 5% fixed-rate government bond where a RM10,000 investment would result in an annual RM500 payment until maturity. Upon maturity, the investor would receive the RM10,000 back.
Why invest in fixed income securities?
Fixed income securities play an important role in a well-diversified portfolio. For many investors, such as retirees, fixed income investments maybe / could be a way to generate a steady flow of income. As long as they are held to maturity, fixed income securities could potentially provide a good return on your investment.
This type of investment is similar to a fixed deposit investment with a bank, which can potentially provide higher yields and appreciation of capital, with certain level of risk.
Some types of fixed income investments include Bonds, Guaranteed Investment Certificates, Treasury Bills and Bankers Acceptances, amongst others. In Malaysia, Malaysian Government Securities (MGS) and Malaysian Government Investment Issues (MGII) are the most common types of fixed income securities.
Risks of fixed income securities
Fixed income securities are generally considered to be a more conservative investment than stocks, but bonds and other fixed income investments still carry a variety of risks that investors need to be aware of.
Some of the risks include interest rates fluctuations (which may affect the value of your bond), inflation factors (which may reduce the value of your yearly yields) and liquidity risks (which may affect your ability to sell your bond before the maturity period), amongst others.
Choosing the right fixed income investment for your needs
There are a lot more fixed income investment options to choose from (compared to equity funds) and while it may seem daunting selecting from such a wide array of choices, a key step forward is to understand your fixed income investment needs and the role your fixed income investment will play in your portfolio.
If you're primarily interested in safety, you should focus on the highest quality securities in order to avoid credit risk and on shorter maturity securities in order to minimize interest rate risk.
If you are seeking capital gains, you are likely to focus on lower-rated securities, such as high-yield bonds or emerging market debt.
If you're seeking to maximize your after-tax income, you may likely narrow your focus to tax-free municipal bonds.
If your priority is income, you might look at high-yield bonds such as corporate bonds or mortgage-backed securities, although high-yield bonds often come with increased risk.
For more information on fixed income investment, speak to our Fund Managers, who will be more than happy to guide you.
Eastspring's Review & Market Outlook
Fund Commentary March 2014