Fixed income refers to any type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. For example, the borrower may have to pay interest at a fixed rate once a year and repay the principal amount on maturity.
Why invest in Fixed Income securities?
To successfully raise money through a fixed-income issue, the issuer must make the security attractive to lenders. These securities are ideal investments for some investors because of the following characteristics of the lending arrangement:
Income – Investors receive interest income as compensation for loaning the original principal amount to the issuer.
Safety- The repayment of the principal amount of the loan and the interest payable on the loan are legal obligations of the issuer. Thus, as long as the issuer remains financially sound, fixed-income securities can be a safe place to invest funds.
Diversification -The risk and return profile of fixed-income securities makes them an obvious choice for diversification in most portfolios, as an integral component in combination with other asset classes.
Returns- Fixed-income securities offer the potential to realise capital gains on the original
investment amount beyond the interest payable.