5 Types of Fixed-Income Investments

Fixed-income investments offer both regular interest payments and return of principal at maturity. This combination of features can make these assets attractive for investors looking to preserve capital while earning a predictable income stream. Plus, as an asset class with low correlation to other popular investments such as stocks, fixed-income holdings can help diversify a portfolio and manage risk. Investors can choose from a variety of different fixed-income investments, including several types of bonds and time-deposit accounts. Each variety has specific features that can offer benefits to individual investors depending on their personal situation.

Consider working with a financial advisor if you want to add fixed-income investments to your portfolio but don't know where to start.

What Is a Fixed-Income Investment?

A fixed-income investment is a type of financial instrument that provides investors with regular interest payments, along with the return of the principal amount when the investment matures. These investments are typically considered lower risk when compared with stocks because they offer more predictable returns.

Fixed-income investments include government and corporate bonds, municipal bonds, certificates of deposit (CDs) and other debt securities.

Fixed-income investments are often used to diversify a portfolio, reduce overall risk and provide a cushion against market fluctuations. They are particularly popular among conservative investors, retirees or anyone who prioritizes income generation and capital preservation over growth.

Types of Fixed-Income Investments

There are several types of fixed-income investments available. Here are five common types to consider:

1. Government bonds are debt securities issued by a government to finance its spending. The bonds issued by a national government are considered among the safest investments because they are backed by the full faith and credit of the issuing government. One of the most popular government fixed-income investments is the U.S. Treasury bond. These long-term securities offer regular interest payments with a promise to return the principal at maturity. They are widely used by risk-averse investors looking for stability.
2. Corporate bonds are issued by companies to raise capital for various business activities, such as expansion or development. They operate similarly to government bonds, except they generally offer higher interest rates to compensate for the increased risk of lending to a corporation. The risk level of corporate bonds can vary based on the issuing company's financial health. The lowest risk are called investment-grade bonds. At the other end of the spectrum are high-yield bonds , also called junk bonds.
3. Municipal bonds , also called munis, are issued by city, county and state governments to fund public projects such as schools, highways and hospitals. One of the key advantages of municipal bonds is that the interest income is often exempt from federal, and sometimes state, taxes. This makes them an attractive option for investors in higher tax brackets looking for tax-efficient income.
4. Certificates of deposit (CDs) are time deposits offered by banks and credit unions that pay a fixed interest rate for a specified term. They are considered very safe, as they are usually insured by the Federal Deposit Insurance Corporation (FDIC) up to a certain limit. CDs are often purchased by conservative investors who want to lock in a fixed rate of return for a set period without exposure to market risk.
5. Agency bonds are issued by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. While not backed by the U.S. Treasury, agency bonds are generally considered safer investments than corporate bonds and typically pay higher yields than Treasury bonds. They are often used by investors seeking better returns while maintaining a low risk profile.

Benefits of Fixed-Income Investments

Fixed-income investments offer several benefits that make them a valuable addition to any investment portfolio:

• Steady income : One of the primary benefits of fixed-income investments is the regular interest payments they provide. This steady income stream is particularly valued by retirees or those who rely on their investments for living expenses. The predictability of these payments makes it easier to plan for the future and cover ongoing costs.
• Capital preservation : Fixed-income investments are often used to preserve capital, as they typically involve lower risk compared to equities. Since these investments pay back the principal at maturity, they offer a safe haven for investors who want to protect their initial investment from market volatility.
• Diversification : Adding fixed-income investments to a portfolio can help reduce overall risk by diversifying the asset mix. This diversification can protect against the impact of market downturns, as bonds and other fixed-income securities often perform differently from stocks.
• Lower volatility : Fixed-income investments are generally less volatile than stocks, making them suitable for risk-averse investors. The stability of returns from fixed-income investments can help balance out the more unpredictable nature of equities.

How to Invest in Fixed-Income Investments

Individual fixed-income securities, such as bonds or CDs, can be purchased directly from financial institutions, brokers or the government. This allows you to select specific investments that match your income needs and risk profile.

Mutual funds and exchange-traded funds (ETFs) that focus on bonds offer an especially convenient way to invest in fixed-income. Shares can be purchased through any brokerage account. The funds pool money from multiple investors to purchase a diversified portfolio of bonds, offering broad exposure without the need to manage individual securities.

Certificates of deposit are available from almost any bank or credit union. They are sold in maturities of from 28 days to 10 years, and pay a stated rate of interest. Up to $250,000 per depositor per institution is generally insured against loss. Withdrawing before the maturity date typically involves paying some kind of penalty.

You can also work with a  financial advisor or wealth manager, who can create a customized fixed-income portfolio for you that may incorporate a blend of all these types of fixed-income investments. Managed accounts can provide tailored advice and ongoing management of your fixed-income investments, ensuring they align with your financial goals.

Bottom Line

Fixed-income investments generally represent part of any well-rounded investment portfolio. They offer steady income, capital preservation and, importantly, diversification. A variety of fixed-income investments are available, each offering a particular combination of yield, safety and convenience. Investors can combine these fixed-income investments with other assets to create portfolios that suit their individual risk profiles, investment horizons and other characteristics.

Investment Planning Tips

• A financial advisor can work with you to build an investment portfolio based on your goals and risk level. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• SmartAsset's investment return and growth calculator can tell you how much your investment portfolio will be worth over time.

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