Fixed Income

Fixed income products are investments that provide a fixed interest payment on a regular basis

 

The amount of interest paid is based on the amount you invest and on the interest rate. GICs, money market instruments and bonds are common types of fixed income products. The beauty of fixed income products is that the payment doesn’t vary depending on market conditions and is predictable and reliable. This means that fixed income products are very low on the risk spectrum.

 

The downside is that the interest rate paid on these products is currently very low

 

The rate on a GIC is right now (Oct. 2021) is less than 0.5% for a one-year investment. Considering that price inflation in Canada is usually around 2%, the buying power of your money is actually eroded over time, because the cost of living is going up faster than your money is growing. This hasn’t always been the case but  it has been a problem for investors in fixed income for a number of years now.

 

You can access fixed income investment by buying a GIC, money market fund, or bond mutual fund or ETF

 

A GIC will guarantee your principle and pay a set rate of interest. Bonds are a little different. A bond is usually issued by a company or government. The bond comes with a set rate of interest, and it gives you a regular, fixed interest payment, but unlike a GIC, the value of a bond fluctuates. Buying individual bonds isn’t such a common thing to do. Instead, you can buy a bond mutual fund or bond ETFs, which gives you a basket of bonds. These funds can provide a higher return than a GIC since they are professionally managed and actively trade bonds. Money market funds are similar to bond funds but invest in short-term fixed income securities and can be viewed as an alternative to a savings account. 

What's to like

  • Regular, predictable interest payment

  • Value of the GIC investment is guaranteed

  • Adds stability to an investment portfolio

The downside

  • Lower returns than stocks, on average

  • Money might be locked in for a period of time

  • Bonds and bond fund will fluctuate in value

How can I use fixed income?

Bonds and bond mutual funds and ETFs can reduce the volatility of your portfolio

Although stocks will most likely give you a higher return in the long run than bonds, the value of bonds doesn't fluctuate as dramatically as stocks. Also, stocks and bonds can move in different directions so if the stock market has a bad year, bonds might help to offset the losses. Traditional advice states that all portfolios should have a mix of stocks and bonds. 

Guarantee the value of your savings won't go down

GICs are a popular way of earning a bit of a return on your money while being sure you won’t lose any of the capital you put in. This makes sense if you will need the. money for something in the near future and want to make sure it will be there when you need it. Bond funds can also be used for savings you need in the near term, but the value of your savings could go down a bit.

Anything else I need to know?

Money in GICs is usually not accessible

Most GICs are "non-cashable", which means that you cannot take your money out until the end of the term you chose, which ranges from 30 days to 5 years. This makes a GIC a poor choice for your emergency savings, which you may need on a moment’s notice. Some GICs are cashable, but you’ll be getting an even lower rate of return.  Mutual funds and ETFs on the other hand, as easily accessible.