What to Know Before Investing in Fixed Income Funds in Australia

A fixed-income fund is a type of investment that offers regular returns. Many people in Australia consider fixed income as less risky compared to stocks since investors will have an idea what the rate of return is, without having to worry if the values in the market fall or fluctuate.

In this type of investment, the funds get invested in different kinds of assets, depending on the existing fund policy. A fund manager will manage all the money, including what you’ve invested, to grow the fund. That said, the fixed income fund is ideal for those who are relatively new to investments and prefer a low-risk option.

Here are the things that you need to know if you’re planning to invest in fixed income funds in Australia.

What Are The Different Investment Policies?

Keep in mind that there are different investment policies associated with fixed-income funds, and you have to choose one based on your needs carefully.

Below are the common options you’ll encounter:

  • Short-Term Fund – If you want to invest in debt instruments for a short period, typically with less than 1-year maturity, then check out this type of fund. Short-term funds are also ideal for those who want a low-risk investment.
  • Long Term Fund – This type of fund is low-risk, as the short-term fund. However, as the name suggests, this fund gives investors the chance to invest their money in debt instruments that have a duration of more than a year.
  • General Fund – This type of fund allows you to invest in both private debt instruments and government bonds. Like short-term funds and long-term funds, general fund suits investors who want a low-risk investment with consistent interest. The low-risk nature of this fund makes the return less volatile even if there’s a chance for the bond price to change based on the market conditions.
  • Flexible Fund – As the name suggests, the investor in this type of fund should be flexible to whatever decisions that the fund manager makes. There’s no restriction in terms of investment proportions in this type of fund, unlike the other ones previously mentioned. The fund manager looks into the conditions of the market and decides for appropriate proportions. Since flexible fund gets invested in many assets, this is ideal for investors who would like to diversify and are willing to accept a moderate level of risk.
  • Fund Of Funds – Like the flexible fund, this type of fund is ideal for individuals who want to diversify their investments and who can accept a moderate risk. This policy allows for the investment of the fund in other types of funds, including mixed funds and mutual funds. For this type of fund, around 65% goes to other funds while the rest goes to debt instruments and stocks.
  • Balanced Fund – When you choose this policy option, your money gets invested in debt instruments, equity, or deposits. This type of fund is also ideal for investors who want to diversify their portfolio and are willing to accept moderate risk levels.
  • Mutual Funds – Your money gets invested in different types of foreign debt instruments. Mutual funds have a high risk since foreign investments are subject to price and exchange rate fluctuations but offer greater returns.

What Are The Benefits Of Investing In Fixed Income Funds In Australia?

Investing in a fixed-income fund in Australia offers many benefits. Depending on what goals you have for your investment, you get to enjoy the following:

  • Generate a Source of Income – Since fixed income funds offer regular return rates in a specific time frame, it can become a steady source of income for you. In many cases, the return from fixed-income investments gets exempted from taxes.
  • Investment Portfolio Diversification – As already mentioned, fixed-income funds offer a less risky investment than the stock market. This type of investment is less sensitive to geopolitical events, economic downturns, and other macroeconomic risks.

With saving for retirement and achieving long-term goals in mind, you probably already have a significant investment portfolio. However, if you want to minimize losses that result from market swings, it’s an excellent idea to allocate a portion of your investment portfolio to fixed-income funds.

  • Protect Your Investment’s Absolute Value – Investing in fixed-income funds is an effective way to protect and preserve your investment capital because of its stated rate of return. Fixed-income funds are perfect for individuals who are nearing their retirement and don’t have enough time to recoup investment losses. Since this type of investment carries minimal risk, investors have the assurance of safe investment returns.

Is There a Chance to Experience a Loss in Fixed-Income Funds?

As already mentioned, a fixed income fund is a low-risk investment, which means that it doesn’t get easily affected by fluctuations. A loss is unlikely since most fixed income funds offer regular returns. The return is consistent, like getting five percent annually and getting paid every six months. The only chance for investors to experience a loss in a fixed income fund is when the fund manager fails to invest in assets with the highest yields.

However, it’s essential to note that fixed-income funds may depreciate in value, which happens if they get sold before maturity at a lower price.

Who Should Invest in Fixed-Income Funds?

Fixed-income funds are ideal for investors who want to stay on the safe side of the road and don’t want much risk. Of course, since a fixed-income fund is low-risk, you also can’t expect a high return from it. Nevertheless, this type of investment offers regular returns, which can be a source of income for many people. It can also be a great way to diversify investment portfolios and achieve capital preservation.

Despite being low-risk and offering regular return rates, investors in Australia still must study the information of the fixed-income fund before shelling out money for it. Read and understand its prospectus, so you know what to expect exactly.

Final Thoughts

A fixed-income fund is an approach in investment which focuses on the preservation of capital. This type of investment can give you a steady stream of returns with lesser risks than other forms of investments available today. While it’s a safe investment choice in Australia, it’s essential to review the things discussed in this post first before investing in fixed income funds to make sure that it’s a good fit for you.