Fixed interest or bonds are a type of investment that involves lending money to an issuer in exchange for regular interest payments and the return of the principal amount at maturity.
When you invest in fixed interest or bonds, you become a creditor of the issuer and are entitled to receive a fixed amount of interest income for the term of the bond.
Fixed bonds can be issued by various entities such as corporations, governments, and municipalities, and can have different maturities, interest rates, and levels of risk. The interest rate of bonds is usually set at the time of issuance and is determined by the creditworthiness of the issuer and prevailing market conditions.
Investing in bonds can be a good option for individuals who are looking for a more predictable and stable source of income than other types of investments, such as stocks. However, investing in bonds also comes with certain risks, such as the possibility of default by the issuer, inflation and changes in interest rates.
To invest in bonds, you can buy individual bonds or invest in a bond mutual fund or exchange-traded fund (ETF). It's important to research individual bonds and funds before investing and to consult with a financial adviser to determine if fixed interest or bonds are a suitable investment option for your personal financial goals and risk tolerance.
Alternatives include a wide range of investments such as property, commodities (like precious metals such as gold and oil), or currencies.
Alternative investments can help provide resilience against inflation but may also be volatile.
Directly purchasing a property means you own a tangible asset. Usual purchases include second homes, buy to lets or holiday lets. Direct property ownership generally does not correlate to other asset classes, meaning the property value and rental income will move independently to other assets and is not always affected by stock market performance.
Note, property investments are not completely safe.
For example, the 2008 financial crisis saw the value of property plummet. Investing via an investment fund on the stock market generally exposes the investor to large commercial properties that would often be unavailable for direct investment. Such properties can be located worldwide and generally include offices, retail and leisure developments, warehouses or industrial units. Property investments introduce liquidity risk as properties can be difficult to sell at short notice. Capital growth can be attained from increases in property value. Income is generated through rent received.
Commodities do not produce a regular income however they can help hedge against inflation.
Often referred to as Gilts (loans to Governments) or Corporate Bonds (loans to Companies).
Bonds pay a regular income to investors (known as a coupon). Bond capital values tend not to increase or decrease as much as equities, however bond values can still fluctuate.
When inflation and interest rates rise this can have a negative effect on bond values. When inflation and interest rates fall this can have a positive effect on bond values. Bonds are traditionally less risky than equities but likely to provide a lower return over the longer-term.
Bonds are classified by the credit rating of the 'body' who provides the loan.
Bonds with a stronger credit rating are called 'Investment Grade'. Investment Grade bonds tend to be lower risk and can deliver lower returns.
Bonds with a weaker credit rating are called 'High Yield'. High Yield bonds tend to be higher risk and can deliver higher returns.