Myths regarding fixed income investments

Fixed income investments are generally opted for a steady income and safety of capital invested. Although, this is one of the most conservative approach towards investment, many people prefer fixed income investment. There are a lot of instances in the long-term where equities have outperformed fixed income by a considerable margin. However, many just hate the volatility that equity brings in with it. Having said that, people must understand that there is no investment that carries zero risk. So, it is always better to keep your expectations realistic. Nevertheless, following are some of the myths that revolve around fixed income investments:

Can generate wealth
Fixed income securities are more inclined towards the purpose of wealth protection rather than, towards wealth creation or accumulation. Hence, this is a myth that fixed income investments can create wealth along with protecting your capital. Although even if they do, they come with a greater risk. Thus, you can create wealth but do not expect capital protection in such cases.  It is always better to opt for equity investments for wealth creation. This is because equity can generate better risk adjusted returns than fixed income.

Fixed income investments are risk-free
This is one of the common myths with respect to fixed income investment. Most of the population believes that fixed income investments are risk-free because they are not as volatile as equity investments. However, this is a myth. There is no investment in a world that poses zero risk. Yes! The risk can be low, but not zero! Fixed income investments have reinvestment risk. This means that you might not get the same interest when you renew your fixed income investment. Apart from that, they also pose credit risk, inflation risk and interest rate risk as well.

Age equals fixed income investment
There is one of the most popular thumb rules that believe that your fixed income investments should be equal to your age. Say for instance, your age is 30, then your fixed income investments must be 30 per cent and remaining should go to equity investments. However, this is not the right way of investing. Let’s say you have to invest for your brother’s marriage which is due in three years. In this case, you cannot invest in the proportion of 30 fixed incomes and 70 equities. As the period is short-term, you need to be 100 per cent invested in fixed income. Therefore, do not rely on this thumb rule rather, it would be prudent to have a financial plan in place, which would help you to invest based on your financial goals.