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The fixed income portfolio of an investor consists of investments in securities that return regular payments, usually in the form of interest. These interest payments come from bonds, which are essentially loans from an institution to an investor in return for repayment of the principal of the loan as well as interest payments at a specified rate. To build a strong fixed income portfolio, an investor should balance his bond purchases between safer instruments like government bonds and riskier corporate bonds. This will allow for the potential for capital growth while still protecting against the inherent risks of fixed income instruments.
Investors who fill up their portfolio with stocks must deal with the fact that the stock market can be extremely volatile. The stocks within a portfolio are often at the mercy of the market as a whole, rising and falling in unpredictable ways and taking the values of investors' shares along with them. As a result, many investors may attempt to build a strong fixed income portfolio that consists of securities capable of paying them off even when the stock market tumbles.
Building a strong fixed income portfolio requires understanding how bonds work. When an institution issues a bond, the investor coughs up an initial capital amount but receives regular interest payments at predetermined intervals, often monthly or yearly, and also eventually gets her regular investment back. The only risk the investor runs is if the institution offering up the bonds defaults on its obligations to pay investors back.
As a result, different types of bonds offer investors different levels of security and rates of return depending on the institution offering them. For example, government-issued bonds are generally safe from any threat of default, but they also offer investors relatively low interest rates. On the other hand, corporate bonds may offer high interest returns, but corporations also run a far greater risk of defaulting on their obligations, as they can suffer in a bad economic climate. A solid fixed income portfolio will have a variety of bonds constituting multiple levels of risk and possible reward.
One way to build a strong and diversified fixed income portfolio is through participation in mutual funds. Mutual funds take funds from multiple investors, who then share in the gains and losses of the securities within the fund. Such funds are professionally managed, and many focus on fixed income securities. As a result, mutual funds can act as a one-stop shopping center for those looking for a diversified bond portfolio.
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