In recent months, fixed income investments have grown in popularity among retail investors in Kenya.
For instance, by June 2024, over 1.2 million individuals had signed up for investment schemes in this market class, a trend that reflects a growing recognition of the benefits that these relatively low-risk investment options can offer in today’s volatile economic climate.
But what exactly are fixed income investments?
At their core, they are securities that provide regular interest payments and return the principal at maturity.
The common investment options in this market include bonds, treasury securities, and fixed income mutual funds. Such funds are designed to generate income while preserving the investment capital, making them particularly attractive for those looking to diversify their portfolios at a reduced risk.
Among the key advantages of fixed income investments is their ability to provide predictable returns. The regular interest payments that are attached to fixed investments can create a steady income stream, making them especially appealing in times of uncertainty by helping investors to plan for future expenses.
This is in comparison to options like equities, which offer the allure of high returns, but often come with significant volatility, and may not be easy to plan around.
Additionally, fixed income investments play a vital role in diversification, for example by allowing investors to balance stocks and bonds, ultimately reducing the overall risk of their portfolios. In such an arrangement, the lower volatility associated with fixed income securities acts as a buffer against market fluctuations, providing a sense of security for cautious investors.
Meanwhile, fixed income portends major benefits for the general economy where assets such as inflation-linked bonds can help protect purchasing power as rising prices threaten to erode savings. These are, however, more common in developed nation markets.
Yet even against all these strengths, the notion that fixed investments are “boring” or solely for conservative investors tends to be pervasive, overlooking the dynamic nature of this asset class. Indeed, fixed income can be an active arena, especially when approached with a nuanced understanding of the various strategies that can be employed to cater to different risk appetites.
However, as with any other investment, assessing individual risk tolerance and financial goals is paramount.
Current market trends also warrant attention as fluctuating and rising interest rates can impact bond pricing, leading to potential losses for investors if they are not adequately informed. Understanding credit risk and default rates in corporate bonds is, therefore, critical, particularly in a low-yield environment where fixed income returns may not seem as attractive.
At the same time, it is important to recognise that fixed income investments are not a one-size-fits-all solution and should complement a broader investment strategy. Tips such as layering bonds to manage interest rate risk or mixing short-term and long-term securities can enhance an investment portfolio’s resilience.
Finally, fixed income investments deserve serious consideration in any well-rounded investment strategy. This class of assets offers stability, income generation, and risk reduction, making it a great option to explore for those interested in enhancing their investment plans.
The writer is a Senior Portfolio Manager, Old Mutual