What Is Fixed Income Investment? Key Benefits and Risks Explained

RichVintage / Getty Images

Commitment to Our Readers

GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.

20 Years
Helping You Live Richer

Reviewed
by Experts

Trusted by
Millions of Readers

If you’re wondering what is fixed income investment and whether it deserves a spot in your portfolio, you’re not alone. Fixed-income investments offer predictable interest payments and the return of principal at maturity — making them a popular choice for investors seeking steady income with lower risk.

In this guide, we’ll break down how fixed-income investments work, their different types, the advantages and potential risks and how they can fit into a diversified investment strategy.

What is Fixed-Income Investment

Fixed income is a type of investment that pays a set amount of interest or dividends.

When you purchase a fixed-income investment, like a bond, you’re lending money to an entity, like a government, corporation or bank, called the issuer. In exchange, the issuer pays you a regular income until the investment matures.

At maturity, the issuer repays you the amount you originally invested, also known as the principal or face value.

Fixed income is popular with investors because it tends to carry less risk than stocks and provides consistent cash flow.

Types of Fixed-Income Investments

Bonds

Bonds are the most common type of fixed-income investment. When an issuer sells bonds to investors, it raises capital in exchange for the promise of regular interest payments. 

At the defined maturity date, the issuer promises to pay investors the bond’s par value (also called the face value). Since bonds pay a fixed interest rate, it has given rise to the classification of “fixed-income” investments.

There are several types of bonds, but two of the most popular are:

• Government bonds: National governments issue bonds to finance public projects like roads, schools and hospitals. They’re considered very low risk due to government backing.

• Corporate bonds: Companies issue bonds to fund their operations or expansion. These bonds generally carry more risk but may have higher returns.

After purchasing a bond, you can either hold it until the maturity date and collect the interest payments or sell it on the secondary market.

Certificates of Deposit (CDs)

Certificates of Deposit (CDs) are time-bound deposit accounts offered by banks. You deposit money for a fixed term and earn a guaranteed interest rate. CDs are typically insured by the FDIC up to $250,000, offering security but lower returns compared to other investments.

A CD is a deposit account where you leave your money for a set amount of time. During that time (called the term), you earn a fixed interest rate on your balance.

Once the CD matures, you can withdraw your principal and interest (although some banks let you withdraw the interest throughout the term). However, if you need your original balance back early, you may have to pay penalties.

Unlike bonds, CDs are typically FDIC-insured up to $250,000, so your money is guaranteed if the bank fails. However, you might not earn as high of returns as you would with other higher-risk investments.

Treasury Securities

The U.S. Department of Treasury issues Treasury securities so the government can borrow money for expenses like the military, infrastructure and social programs. Here’s a look at the main types of Treasury securities:

• Treasury bills (T-Bills): T-Bills are shorter-term securities that mature within four to 52 weeks. You can profit from T-Bills by buying them at a discount and getting paid the face value once they mature. 

• Treasury notes (T-Notes): T-Notes have maturities ranging from two to 10 years. They earn a fixed interest rate, which is paid every six months until maturity. You can either hold the investment until the maturity date or sell it early.

• Treasury bonds (T-Bonds): T-Bonds are long-term investments, maturing in either 20 or 30 years. Like T-Notes, Treasury bonds earn a fixed interest rate and payout every six months. You can also choose to hold the bond or sell it before maturity.

Treasury securities are one of the safest fixed-income investments because they’re backed by the U.S. government, which means there’s a low risk of default.

Municipal Bonds

State and local governments often issue municipal bonds, or “munis,” to fund public projects like building schools, sewer systems and highways.

You typically don’t have to pay federal income taxes on municipal bonds and sometimes they’re exempt from state and local taxes as well if you live where the bond was issued.

Munis are generally safe investments but still have some credit risk, meaning there’s a chance the issuer could default on its debt.

Benefits of Fixed-Income Investments

Investors often turn to fixed income for several reasons:

• Steady income: Fixed-income investments provide predictable payments, making them ideal for budgeting and retirement planning.
• Lower risk: While not risk-free, fixed income typically offers more stability than stocks, especially government-backed securities and insured CDs.
• Predictable returns: You’ll know the interest rate and principal repayment terms upfront.
• Portfolio diversification: Fixed income can balance out the volatility of equities, reducing overall portfolio risk.

Risks of Fixed-Income Investments

While fixed income offers many advantages, it’s important to be aware of the potential downsides:

• Interest rate risk: If market rates rise, existing bonds with lower rates become less attractive, reducing their market value.
• Credit risk: Corporate and municipal bonds carry the risk that the issuer may default on payments.
• Inflation risk: Returns may not keep up with inflation, eroding your purchasing power.
• Liquidity risk: Some fixed-income investments, like certain bonds or CDs, may be hard to sell quickly without a loss.

How to Invest in Fixed Income

If you’re ready to add fixed-income investments to your portfolio, there are a few ways to get started:

• Brokerage accounts: Online brokerages offer a wide variety of fixed-income investments, including Treasuries, corporate bonds and CDs. Some major brokerages have tools that help you invest in bonds and track their performance.

• Direct purchase from issuers: You can buy U.S. Treasury securities straight from the government at TreasuryDirect.com. There are no fees or commissions, but if you want to sell your investments before maturity on the secondary market, you’ll have to transfer them to a brokerage account. 

• Bond mutual funds and ETFs: These funds offer a simple way to diversify in several fixed-income investments. Bond mutual funds and ETFs are professionally managed, so you may have to pay fees or commissions.

Fixed-Income Investment Strategies

Once you have a solid understanding of what is fixed-income investment, along with its benefits and risks, you can start considering which investment strategy you want to use:

Laddering Strategy

Laddering is when you invest in multiple fixed-income securities with staggered maturity dates. For example, you might buy a: 

• 3-month CD
• 6-month CD
• 1-year CD
• 18-month CD
• 2-year CD

Since you’re regularly regaining access to your cash, this strategy helps manage liquidity risk. It also protects you against interest rate risk since you can reinvest as investments mature, hopefully at a higher rate.

Buy and Hold Strategy

Some investors like speculating with fixed-income investments, trying to buy low and sell high on the secondary market. However, holding them until maturity is more passive and generally a safer approach.

With the buy-and-hold strategy, you purchase your fixed-income investment and simply hang on to it until the maturity date. Since they pay a fixed interest rate, you’ll receive a steady stream of income, even as the market fluctuates.

As long as the issuer doesn’t default, you’ll get your full principal back once the investment matures.

Active Management

With active management, you (or a professional investment manager) try to outperform the overall market by strategically buying and selling fixed-income investments.

Although there may be an opportunity for higher returns with active management, it involves more risk than the buy-and-hold strategy.

If you hire an investment advisor to manage bond mutual funds or ETFs, you’ll likely pay higher fees, including management and transaction costs.

How Fixed-Income Investments Fit into a Portfolio

Adding fixed-income investments can balance a portfolio heavy in stocks or real estate. Because fixed income and stocks often move inversely, a mix can help reduce overall volatility and risk.

A simple rule of thumb: subtract your age from 110 to estimate what percentage of your portfolio should be invested in stocks, with the remainder allocated to bonds or fixed-income products.

For example, a 40-year-old might invest 70% in stocks and 30% in fixed income.

Fixed Income vs. Other Investment Types

Final Take to GO: Is Fixed Income Investment Right for You?

Fixed income investments offer stability, steady income and lower risk — making them an attractive choice for many investors, especially those nearing retirement or seeking diversification. However, it’s important to balance these advantages with potential risks like inflation and credit defaults.

Understanding what is fixed income investment and how it fits into your overall financial plan is key to building a resilient, well-rounded portfolio. Whether you’re looking for safe income, reduced risk or simply a more balanced investment strategy, fixed income could play an important role in achieving your goals.

Information is accurate as of April 28, 2025.

Editorial Note: This content is not provided by any entity covered in this article. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by any entity named in this article.

Share This Article: