Why Fixed Income?

Fixed income investing offers investors several key benefits:

	Diversification: Help reduce volatility in your portfolio

	Income: Fixed income dividends help supplement other income sources


	Tax Advantages: Some fixed income investments are exempt from federal and/or state income taxes

Diversification

Fixed income investments are a necessary component of a portfolio that is diversified across different asset classes. Historically, bonds have returned more than cash investments, and exhibited less volatility than stocks. In addition, the return on bonds has often offset the negative return on stocks during periods of market downturn. As a result, adding bond investments to an all-stock portfolio generally lowers the risk of your overall portfolio. Keep in mind that even within asset segments, like stocks or bonds, an investor should have some diversification through many individual securities or through mutual funds.¹

Some investors think it's possible to identify the moment when it's best to buy bonds or bond mutual funds, even as they acknowledge that you can't time the equity markets. For example, they'll try to predict the rise or fall of interest rates and buy bonds or bond mutual funds based on that guess. It is, of course, impossible to time the market.

Income

Many investors – particularly retirees – seek ways to generate additional income from investments to supplement their existing income. Fixed income investments may be one way to do this.

Bond mutual funds provide diversification within the fixed-income asset class by investing in many individual bonds and across a variety of sectors and maturities. In addition, for most investors bond funds can be a more convenient, liquid, and cost-effective way to invest in the fixed income asset class than individual bonds.

It's important to note that, 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.

Bond funds generally pay a monthly dividend which can be received as cash or reinvested for compounded growth, while individual bonds typically pay dividends semi-annually.



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	Fixed Income Analysis

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	Bond Funds invest in many securities with different coupon payments. The income received from the underlying investments is distributed monthly to shareholders. The distribution may vary from month to month.*



	*When you sell shares in a fund, you receive the current net asset value (NAV), less any redemption fee, if applicable.


	Individual Bonds pay a fixed stream of income, generally semi-annually, and they return your principal on a specific date if held to maturity.**


	**Any fixed income security sold prior to maturity may be subject to a substantial gain or loss.

Tax Advantages

The interest income generated by some fixed income investments issued by federal, state, and municipal governments, is exempt from federal and/or state income taxes. In addition, some municipal investments generate interest income that is also exempt from the federal Alternative Minimum Tax (AMT) which generally only affects investors in the higher federal income tax brackets.

Frequently, because of their tax-free status, tax-exempt fixed income investments offer lower yields. However, depending on your tax bracket, they may actually generate more income on an after tax basis than higher yielding taxable investments.

Hypothetical example of $100,000 invested in a fixed income security generating interest income exempt from federal income taxes with one generating taxable interest income.

	Tax-Exempt	Taxable
Yield	4%	5.5%
Annual Interest	$4,000	$5,500
Federal Income Taxes Paid	$0	$1,540 (28% marginal federal ordinary income tax rate) $1,815 (33% marginal federal ordinary income tax rate)
Net Interest Income	$4,000	$3,960 (28% marginal federal ordinary income tax rate) $3,685 (33% marginal federal ordinary income tax rate)

These hypothetical examples are not intended to predict or project investment performance. Your own results will vary. State and local taxes, if any, fees, and expenses are not taken into account. If they were, certain results would be lower. Interest income generated by municipal bonds is generally expected to be free from federal income taxes and, if the bonds are held by an investor resident in the state of issuance, state and local income taxes. Such interest income may be subject to federal and/or state alternative minimum taxes.

In general, 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.

1 Diversification does not ensure a profit or guarantee against loss.

Interest income generated by municipal bonds is generally expected to be free from federal income taxes and, if the bonds are held by an investor resident in the state of issuance, state and local income taxes. Such interest income may be subject to federal and/or state alternative minimum taxes. Investing in municipal bonds for the purpose of generating tax-exempt income may not be appropriate for investors in all tax brackets. Short- and long-term capital gains and gains characterized as market discount recognized when bonds are sold or mature are generally taxable at both the state and federal level. Short- and long-term losses recognized when bonds are sold or mature may generally offset capital gains and/or ordinary income at both the state and federal level.

Information provided is general and educational in nature. It is not intended to be, and should not be construed as, legal or tax advice. Fidelity does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Consult an attorney or tax advisor regarding your specific legal or tax situation.

The performance data featured represents past performance, which is no guarantee of future results. Investment return and principal value of an investment will fluctuate; therefore, you may have a gain or loss when you sell your shares. Current performance may be higher or lower than the performance data quoted.