Fixed Income Investments Are An Important Hedge In Your Portfolio During Market Downturns

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In recent months, equity markets have experienced massive volatility, and investors prioritize building balanced and resilient portfolios. As a result, fixed-income investments have grown in popularity because they offer stability to investors’ portfolios.

Fixed income investments, often referred to as debt investments are less risky compared to stocks. They offer investors exposure to various asset classes to keep their portfolios’ income high, minimize risk, and beat inflation.

Current economic downturn impacting fixed-income investments

With fixed-income investments, one knows upfront the rate of return or interest they will receive. Mostly bonds or debt funds investing in securities that offer fixed interest payments form part of these investments, and their prices might change with may alter the investment return. Sometimes, bond markets can become illiquid, or changes in the economy can lower interest rates, resulting in lower prices and low returns.

The current economic downturns have also affected fixed-income investments because of several credit events that have resulted in write-downs in fund values. Although there have been mutual funds credit defaults in the past, they have not been massive like what is currently experienced. The write-downs have exposed the lack of liquidity in low-rated bonds pushing investors to rethink their fixed-income investments.

Why consider fixed income investment in your portfolio

Besides offering hefty returns, fixed-income investments can be vital in stabilizing one’s portfolio against economic shocks. They are a way of diversifying your portfolio from stocks, and since they experience less volatility relative to stocks, they offer resilience. Most importantly, there is a reason they are called fixed income as they can explicitly offer predictable income flow from the coupons associated with them. Although yields can vary depending on prices, the coupon on fixed-income investments don’t change.

During a downturn, bonds usually appreciate, and the returns are realized to enhance your portfolio yield. For instance, like in the current circumstance, stocks are experiencing volatility, and as a result, binds are becoming a natural hedge for most investors in their portfolios.

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