With all the options available for investing, it can be hard to decide what is right for your portfolio. While seasoned investors know that you need a mix of various stocks, bonds, cash, and other investments, new or conservative investors can get sidetracked by the amount of options available, especially within the bond market. If your risk tolerance is too low for stocks or bond funds, you might want to consider fixed rate bonds.
What Are Fixed Rate Bonds?
A fixed rate bond is exactly what it sounds like. It is a note that is secured by a bank or government that carries a guaranteed rate of interest if the bond is held for the specified maturity period. Maturity periods can vary, but generally the shortest available period is one year. As such, it is not subject to fluctuations in interest rates. You will not lose money on bonds if you hold them until maturity because the interest rate is stable. This can certainly appeal to conservative investors or retired individuals who can’t risk losing principal from their portfolio. However in today’s arena of low interest rates, bonds can actually lose money due to inflation.
One way around this is to choose your fixed rate bonds to suit your lifestyle. There are options available that can track interest rates and adjust upward if the rate does increase. These are generally purchased through a bank in the UK or through the federal government in the US.
While it might be possible to lose money if interest rates were to fall, this is an excellent time to look into rate tracking bonds because interest rates are at all time lows. If there is a rise in bank rates, you would be able to take advantage by a boost in the bond interest rates.
Points to remember when investing in fixed term bonds or rate tracking bonds:
- Make sure you won’t need the money for the duration of the maturity period. If you have to withdraw before hand, you will be subject to penalties.
- You don’t get the high gains of stocks, but you won’t have to worry about huge losses with a market down turn either.
- Keep up with maturity dates. If you don’t specify, money held in bank sponsored bonds will roll back over into a new bond when the maturity date arrives, which is great if you want to continue with this type of investment. If you were planning on withdrawing, though, make sure you stay on top of the date of maturity.
When looking for conservative investments or ways to add diversity to your portfolio, always consider fixed rate bonds. They may not be the most exciting investments, but when your money is on the line, sometimes slow and steady wins the race