Fixed income provides income from regular coupon payments, which occur on set dates throughout the year. This income is dependable; investors know when and how much income they will receive at each payment period, which may be monthly, quarterly, twice yearly or annually.
Most fixed income investments are classified as defensive assets, with a different risk and return profile to equities. As an asset class, fixed income help with diversification because of their low correlation to other asset classes. This is because fixed income assets are generally less volatile on average to stocks because more is known about their income flow (e.g. the certainty of coupon vs non-certainty of dividends) and tend to do better when stock markets slump.
Bonds also provide capital stability. Principal is to be repaid to investors upon maturity of the bond. This makes many fixed income securities, especially government and government-guaranteed bonds, an effective capital preservation tool. This of course, assumes that the issuer doesn’t default, which is where the in-depth analysis undertaken by Opus’ team of experienced professionals come into play.
While investors turn to property and shares for income, they often turn to cash (e.g. bank accounts or fixed deposits) to minimize their overall risk exposure. However as interest rates have fallen, such assets no longer provide the same level of income as they once did and may barely keep pace with inflation.
Similar to fixed deposits, fixed income investments may yield a stable interest income that is usually higher than the interest received from normal deposit rates for a comparable tenure, with an added chance of capital appreciation. Furthermore, unlike fixed deposits, there are no penalties should the investors wish to redeem their investments.
Despite this, many Malaysian investors continue to rely heavily on fixed deposits for their defensive exposure. As the Malaysian population is expected to become an ageing nation by 2030, there is a growing demand for income producing investments as retirees focus on meeting expenses and preserving capital.
The benefits of holding fixed income securities as part of a balanced portfolio are evergreen. Fixed income assets can complement a portfolio by providing a reliable income stream with generally low correlation to shares, property and cash. Add that to the return of capital at maturity, fixed income assets are generally a lower risk option than shares and property.
The key to a successful investment strategy is having the right mix of assets in a portfolio. A diversified portfolio, one which includes fixed income, is generally better positioned to balance risk and return and ultimately meet investors’ investment objectives.