Fixed Income Investing: How to Make Safe, Regular Income

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Fixed-income investments offer a safe, regular, and reliable way to increase your income. Because of the way they are structured, they can be used to supplement your earnings, helping to ease your short and mid-term financial needs.

In this article, we’ll look at 4 common types of fixed-income sources in Kenya: treasury bills, treasury bonds, corporate bonds, and fixed deposit accounts.

We’ll briefly examine how each one works and see how you can take advantage of them immediately. But before we dive into all that, let’s look at a more basic question...

What is fixed-income investing?

It means investing in assets that pay a series of fixed interest amounts at fixed predetermined times until the maturity of the investment.

Here, you get to know exactly how much you’ll earn, when you’ll receive it, and how often you’ll be receiving it. These details are set and agreed upon from the start, so the payments are predictable.

This quality of having a fixed payment structure is why it’s called fixed income. Such investments differ from other types which are usually not fixed or predictable in the same way.

With shares, for example, the amount and frequency of profits made vary depending on factors such as market issues and business factors.

But with fixed-income investments, factors such as time of payment and amount of payment are known, making them perfect for generating a regular and reliable income.

Types of fixed-income investments

While fixed-income assets may differ in their rates of return, they all work in similar ways. Here are the common ones:

  1. Treasury bills - these are short-term government bonds that take anywhere between 3 to 12 months to mature. T-bills don’t pay interest but they are sold for less than their face value i.e. at a discount. Investors, therefore, make money from them by receiving the full face value at maturity.
  2. Treasury bonds - these are mid- to long-term government bonds that typically offer interest payments every six months until maturity. Treasury bonds, like T-bills, are backed by the government and are considered to be relatively safe investments.
  3. Corporate bonds - these are debt securities issued by public companies to raise funds. Investors loan their money to companies that need business capital and the companies pay them a regular interest payment until the maturity of the loan. There are a variety of corporate bonds based on their maturities. Short-term bonds take 3 years or less, mid-term bonds take 4-7 years, and long-term bonds go to 10 years and beyond.
  4. Fixed deposit accounts - sometimes called certificates of deposit (CDs), they are bank accounts where a customer deposits a specified amount for a fixed time duration. During this time, the investor receives a competitive interest payment from the bank.

Read more: Your Complete Guide to Bonds in Kenya

How to invest in fixed-income securities

Here are a few ways that investors can use to invest in fixed-income securities effectively:

  • Buying direct from the organization - Treasury bills and bonds can be bought directly from the government through the treasury. To do this, you’ll need a CDS account and a linked bank account to handle your funds. Once you have both of these, you’ll be required to complete an application form, after which you will be allocated a bond of your own. Get more details from the treasury website here.
  • Using mutual funds/unit trusts - For those not willing to go through that whole procedure, there are bond funds offered by different investment companies in Kenya. Companies like CIC, Old Mutual, and Britam have options that allow you to invest with minimum capital, access professional expertise, and get easy access to your funds.
  • Using the ladder strategy - this is a common strategy with bonds and fixed deposit accounts. It involves investing in a series of securities that mature in a sequence, such that you receive your interest payments in consecutive months. For example, you can buy different bonds at one-month intervals which would mean one matures in January, the next in February, then March, and so on. With this timing, you’d be receiving continuous interest payments at one-month intervals, making your income more regular and predictable.

Why choose fixed-income investing?

  • To earn a steady and reliable income throughout the lifespan of your investment. That’s because they pay a regular stream of interest payments until the duration of the investment comes to an end.
  • To acquire some of the safest investment assets out there, meaning they provide a lot of capital protection compared to other asset types. Bonds, when compared to other assets like shares, are very safe because they are backed by the government and have the highest priority if the institution faces failure.
  • This safety also makes them good for diversification. Their safety and stability make them perfect for offsetting other high-risk investments in your portfolio.

What are the risks of fixed-income investing?

Though they are some of the safest investment assets around, they are not 100% risk-free. Some pitfalls include:

  • The possibility of defaulting - some bond issuers may face business challenges that’ll make them incapable of paying interest or paying back the principal.
  • The risk of inflation - rising prices may eat into the value of your principal over time, especially if you buy long-term securities. This means your money will lose some of its buying power by the time you receive it back.
  • Interest rate risk - if interest rates rise when you’ve already bought a fixed-income asset, you’ll miss out on higher returns.

Key takeaway: Are fixed-income investments right for you?

Along with investors who are keen on having an additional source of regular income, fixed-income investments are also great for beginning investors.

You don’t require a massive amount of money to get started, they are fairly simple to understand, and you can get started almost immediately.

On the flip side, they don’t earn returns as high as other investment assets. In exchange for their stability, they pay lower returns than other assets like stocks. Still, they provide a better alternative to the traditional savings account.