The Role of Fixed-Income Investments in Your Portfolio
There are many types of fixed-income securities — most are bonds that pay a fixed regular payment (known as a coupon) to investors. Some bonds are issued by governments (as in the case of U.S. Treasuries). Some are issued by corporations, individual states and municipalities; there are also various kinds of securities backed by pools of mortgages.
Bonds can play a variety of roles in a wider investment mix. They can serve as a source of potential income, capital preservation, total return and diversification.
Bond funds also come in various flavors. Some funds focus on particular types of bonds, others on specific maturity ranges. For example, shorter term bond funds may emphasize capital preservation alongside seeking modest income. They can, therefore, serve as a source of liquidity.
On the other hand, a longer term bond fund, or one focused on lower rated bonds, may be more volatile and higher income or total return may be the goal.
Most types of bond funds also offer an additional benefit: diversification. Put simply, stock and bond markets typically behave differently. Their returns change by different magnitudes and often move in opposite directions, doing better or worse at different times in the business cycle. Bond returns, therefore, often have served as a counterweight to stock market returns.
The mix of bonds and stocks that is right for you depends on your investment time horizon, objectives, risk tolerance and overall financial health. Your financial professional can help you decide how an investment in a bond fund could potentially help you meet your financial objectives.