Looking for a steady approach to building your portfolio?

Bonds can provide stability and income for your investment strategy. They are often viewed as a ‘safer’ and more stable option, particularly in today’s unpredictable economic environment. Fixed interest investing, also referred to as fixed income or bond investing, can deliver a reliable and steady income stream.

What is fixed interest or fixed income investing?
Fixed interest investments, commonly referred to as bonds, are essentially loans made by governments or companies. When you invest in bonds, you’re lending money to the issuer in exchange for a fixed annual income, known as the ‘coupon’, which is typically a set percentage of the bond’s face value.

Bonds are a fundamental part of a well-rounded investment portfolio, alongside equities, alternative investments and cash. They can be traded daily on the markets, offering a mix of liquidity, predictability and security for investors looking for a stable income stream.

Who is fixed income investing for?
Fixed income investing appeals to those prioritising a consistent and reliable source of income. Retirees, for example, often prefer bonds, as they usually rely on their investments or pensions to cover monthly expenses.

However, bonds aren’t just for retirees. Fixed income investing can diversify a portfolio, reduce volatility and potentially lower overall risk, making it a sensible option for many investors.

Why consider bonds?
Fixed interest investments can play several roles in your portfolio:

Steady income: They provide a consistent income stream, perfect for those seeking reliability.
Risk reduction: Bonds generally display lower volatility and can offset riskier investments like equities.
Portfolio diversification: The performance of bonds often has a low correlation with equities, providing an additional protective buffer.
Tax advantages: According to UK regulations, qualifying corporate bonds and gilts are exempt from Capital Gains Tax for individual investors.

Types and risks of bonds
Not all bonds are created equal. Their risk and returns can vary significantly based on the issuer’s quality and the bond’s features.

There are two main categories to consider:
Investment-grade bonds: These bonds are regarded as lower risk and encompass government bonds (known as ‘gilts’ in the UK) and those issued by financially stable, well-established companies. Typically rated between AAA and BBB by credit rating agencies, they provide stability, albeit with lower returns.
High-yield (Sub-investment grade) bonds: These bonds, issued by companies with less reliable payment capabilities, offer the potential for higher returns but come with increased risk. They are rated BB or lower.

Factors that influence bond prices
Before investing in bonds, it’s crucial to understand what affects their price.

Three key factors play a role:
Interest rate risk: When interest rates rise, bond prices often fall, especially for higher-quality bonds that are more sensitive to these shifts.
Credit risk: This refers to the issuer’s perceived ability to meet payment obligations.
Duration risk: The time left before the bond matures also impacts its price, with longer-dated bonds being more sensitive to rate changes than shorter ones.

Bonds maturing in five years or less tend to be more stable in price, while those maturing later exhibit greater fluctuations. Economic conditions also play a role; during prosperous periods, high-yield issuers are more capable of meeting their obligations.

Are fixed interest investments right for you?
Fixed income investments offer value beyond their income potential. They hold a higher position than equities within a company’s capital structure, indicating a lower risk of loss in liquidation scenarios. This assurance brings peace of mind to cautious investors.

Beyond this, the tax benefits of certain bonds could make them an attractive option for UK individuals. For example, while the income earned is subject to tax, capital gains from gilts or qualifying corporate bonds are not. This allows investors to offset liabilities and use bonds in their portfolios for tax efficiency.

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE. THE VALUE OF YOUR INVESTMENTS CAN GO DOWN AS WELL AS UP, AND YOU MAY GET BACK LESS THAN YOU INVESTED.