Fixed income is an investment approach focused on preservation of capital and income. It typically includes investments like government and corporate bonds, CDs and money market funds. Fixed income can offer a steady stream of income with less risk than stocks.

What are the potential benefits of fixed income?

Depending on your financial goals, fixed income investments can offer many potential benefits, including:

1. Diversification from stock market risk Fixed income is broadly understood to carry lower risk than stocks. This is because fixed income assets are generally less sensitive to macroeconomic risks, such as economic downturns and geopolitical events. If you’re seeking to grow your wealth investments over time to  or other long-term goals, you probably hold a significant amount of stocks in your portfolio. But by allocating a portion of your portfolio to fixed income investments, you can potentially help offset losses when stock markets swing.
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2. Capital preservation Capital preservation means protecting the absolute value of your investment via assets that have a stated objective of return of principal. Investors who are closer to retirement may rely on their investments to provide income. Because fixed income typically carries less risk, these assets can be a good choice for investors who have less time to recoup losses. However, you should be mindful of inflation risk, which can cause your investments to lose value over time.
3. Income generation
   Fixed income investments can help you generate a steady source of income. Investors receive a fixed amount of income at regular intervals in the form of coupon payments on their bond holdings. In the case of many, municipal bonds, the income is exempt from taxes.
4. Total return
   Some fixed income assets offer the potential to generate attractive returns. Investors can seek higher returns by assuming more credit risk or interest rate risk.

What are the risks associated with fixed income?

There are four major risks associated with fixed income:

1. Interest rate risk When interest rates rise, bond prices fall, meaning the bonds you hold lose value. Interest rate movements are the major cause of price volatility in bond markets.
2. Inflation risk
   Inflation is another source of risk for bond investors. Bonds provide a fixed amount of income at regular intervals. But if the rate of inflation outpaces this fixed amount of income, the investor loses purchasing power.
3. Credit risk If you invest in corporate bonds, you take on credit risk in addition to interest rate risk. Credit risk (also known as business risk or financial risk) is the possibility that an issuer could default on its debt obligation. If this happens, the investor may not receive the full value of their principal investment.
4. Liquidity risk
   Liquidity risk is the chance that an investor might want to sell a fixed income asset, but they’re unable to find a buyer.

You can manage these risks by diversifying investments within your fixed income portfolio.