Fixed income investing

Fixed income or fixed interest – also known as bonds or gilts – are a type of investment that provides a regular, fixed amount of income.

They’re essentially loans or ‘debt’ instruments issued by governments and companies. So, when you invest in a bond, you’re effectively lending the government or company your money for a fixed length of time which can be anything from 30 days to 30 years.

At the end of a bond’s lifetime, you get back the full amount you lent the government or company (your capital) plus a set amount of income each year called a ‘coupon’. During the course of ownership, the value of the bond can fluctuate, for example due to changes in the markets’ views of inflation, and interest rates.

Yes, fixed income investments are considered lower risk than many other forms of investment. This is because, if a company fails, its auditors go through a process of repaying its creditors and repaying bondholders is prioritised over shareholders (equities). This ultimately means there’s less risk of losing your capital.

Fixed income investments can be a useful addition to your portfolio as they help to provide diversification. This is because bonds typically (though not always), have an opposite correlation to equity performance, so during times of volatility they may help to smooth your returns.

They’re often very useful for retired investors as they can provide a regular, steady income.

There are various types of bonds, all with varying risk and return profiles.

With lower quality corporate bonds, known as ‘sub-investment grade’ or ‘high yield’, there’s a higher risk that the company issuing them isn’t creditworthy and that it might default on its bond payments. These bonds tend to be more sensitive to the prevailing economic climate, so could be more attractive if times are prosperous.  

Higher quality bonds, issued by governments and large companies, known as ‘investment grade’ bonds, tend to be more sensitive to interest-rate fluctuations. These will decline in price as interest rates rise, making them better value. This is what we’ve seen in markets recently with interest rate rises causing a sharp drop in bond prices.

Yes, fixed income investing may be a useful tax planning tool although you should speak with a professional tax adviser about your individual circumstances. While bond returns are subject to income tax, both ‘qualifying’ corporate and government bonds (gilts) are free of capital gains tax for UK individual investors.