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What is Fixed Income?

Definition, Investment Types and Strategies


Definition: Fixed income can refer to an investment strategy or style that is intended to produce relatively fixed or stable income or it can also refer to investment types within an investment portfolio. From a lifestyle perspective, fixed income can also reflect a person's income.

Fixed Income Investment Strategy

When building a portfolio of mutual funds, the term fixed income generally refers to the portion of the portfolio that consists of funds that are relatively low in market risk and they pay interest to the investor for purposes of generating income. The overall idea for the fixed income investment strategy is to generate stable and predictable returns.

Fixed Income As Retirement Lifestyle

The most common purpose for the fixed income investment strategy is for retirement. This is a time in life where achieving stable and predictable returns is most important. A person in retirement may rely on income sources, such as Social Security, pensions, annuities and/or investment accounts, that produce the same amount of income (or an amount increasing at a small, nominal rate) on a year-to-year basis. In different words, this person' income does not vary materially over time and they may have very little ability to absorb significant increases in periodic expenses.

Types of Fixed Income Savings and Investments

Since the general fixed income strategy is to generate a reliable source of income, investment types can include bond mutual funds, money market funds, Certificates of Deposit (CDs) and/or various types of annuities for the fixed income portion of your portfolio.

Inflation: The Enemy of Fixed Income Investors

When planning for any kind of long-term investment objective, the investor/saver will need to assume at least an average rate of inflation, which has historically averaged around 3.4%. Investors can find it difficult to get yields that outpace inflation without taking significant risk. They can consider bonds for inflationary environments, such as Treasury Inflation-Protected Securities (TIPS) or they may consider bond funds for rising interest rate environments, although these may provide yields below average rates of inflation. Bond investors willing to take some risk may also consider high yield (junk) bond funds.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.

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