| Fixed income investments can be an important part of a balanced portfolio, providing diversification benefits for investors. Fidelity offers a full range of fixed income products, from fixed income mutual funds to individual bonds and CDs, to help you meet your financial goals. |
|
| Bond funds offer a convenient way to invest in fixed income securities. For many investors, bond funds may be a better option than individual bonds because they are professionally managed, furnish liquidity, are diversified, and are offered at reasonable fees. |
|
| But how do you know whether a bond mutual fund or an individual bond might be right for you? Here are some important factors to consider: |
|
|
| How much time do you have to research and monitor your fixed income investments? |
|
| At times, researching individual fixed income securities can be more difficult than researching stocks. Some investments, such as US Treasury bonds, Government Sponsored Enterprises, and CDs are fairly easy to research. However, other investments, such as corporate bonds, are more difficult to research and sometimes there is limited information on a specific issue or issuer. Many bonds do not trade on an exchange, so it may be difficult to monitor what other investors are paying or receiving for similar bonds. |
|
| Top |
|
|
| If you are seeking monthly income, bond funds can provide that income stream. The income stream may vary according to any changes in the underlying bonds and their coupon payments. If you don't need the income each month, you can choose to reinvest your dividends. |
|
| Most individual bonds pay a steady stream of income, through semi-annual payments. Some issuers now offer bonds that pay interest monthly or quarterly. The amount you receive depends on the face value of the bond and its coupon (interest) rate. You can use your interest payments to supplement your retirement income or handle current expenses, or you can reinvest interest payments in other investments. |
|
| Top |
|
|
| Bond funds can provide immediate diversification, regardless of the size of your purchase. Bond funds normally own a number of individual bonds of varying maturities, so the impact of any one single bond's performance is lessened. Certain types of bond funds, such as broad market bond funds, are also diversified across bond sectors, providing exposure to corporate, U.S. government, government agency, and mortgage-backed bonds. |
|
| For most investors, bond funds offer diversification at a lower cost than individual bonds. If you are thinking about investing in individual bonds, consider that a diversified fixed income portfolio may involve purchasing a number of bonds, depending on the type of bonds used. For example, you may need to purchase a significantly larger number of corporate bonds (10-50) for adequate diversification, depending on the underlying issuers. |
|
| A well-constructed bond ladder may help reduce interest rate risk by spreading out the maturities over time, and may reduce credit risk if the securities are of high quality issuance. As the bonds in your ladder mature, the income stream will change if you reinvest the proceeds into new bonds issued at different rates. |
|
| Keep in mind that individual bonds typically require higher initial investments. With face amounts for purchasing most bonds at $1,000 or $5,000 the cost to diversify across issuers mounts quickly. Smaller amounts (or odd lots) are sometimes sold at a premium to round lots (100 bonds or more), which means that less of your investment goes to work for you. |
|
| Top |
|
|
| If your goal is to diversify your equity portfolio, a bond fund can be a convenient way to achieve that diversification. Bond funds are professionally managed, furnish liquidity and are diversified across issuer, maturity and sometimes sector, depending on the type of bond fund you purchase. Bond funds can also play a role in saving for long-term goals such as college or retirement. Indeed, many investors allocate an increasingly larger amount toward fixed-income investments as a child's freshman year of college or a pre-retiree's retirement date approaches. Learn more about Fidelity-managed 529 Plans for college investing, and Fidelity's services for retirees. |
|
| If your investing goal requires a specific schedule of fixed income payments, or a fixed principal amount on a specific date, individual bonds may be appropriate. Because bonds have a fixed maturity date (the date when the principal is scheduled to be repaid to you), you can select bonds that meet your investment time frame. A certain type of bond, called a zero-coupon bond, is often used for college savings as it is purchased at a discount and pays you all of your interest at maturity. |
|
| Top |
|
|
| Another important factor to consider when selecting your fixed income investments is your tax situation. If you are subject to a higher marginal Federal ordinary income tax rate (generally 27% or higher), and you plan to hold your fixed income investments in a taxable account, you should consider investing in municipal bond funds or municipal bonds. Although municipal bond investments typically offer lower yields than their taxable counterparts, the interest income you earn from these investments is usually exempt from federal (and sometimes state and local) taxation1. As a result, the tax-free interest income you earn from municipal investments is often higher than the after-tax income earned on a taxable fixed income investment. |
|
| If you are subject to the Alternative Minimum Tax (AMT)1, you may want to consider a bond fund or bond whose interest income is not normally subject to the AMT. |
|
| Learn more about Getting Started with fixed income investing. |
|
| Top |
|
| In general, the bond market is volatile, bond prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. |
|
|
