Fixed-income investments are preferred by americns for their security and predictability. No less than 85.5% of the money invested in the country is in this category, which ranges from government bonds to credit notes. This information comes from the Instituto Planejar.
Far beyond savings accounts, which maintain their popularity despite low returns, the world of fixed income offers countless possibilities for yields, terms, and liquidity.
Security remains its hallmark. But with proper planning and strategy, it’s possible to diversify your financial products and achieve attractive returns .
Next, we will show how fixed-income investments work, what the main products are, and who they are suitable for.
What is a fixed-income investment?
Fixed-income investments are financial products with predictable returns , meaning they allow investors to predict or calculate how much they will earn. Generally, these are securities that return the invested money plus interest after a certain period.
Therefore, when investing in fixed income, you are essentially “lending” money to someone in order to receive the principal back with added interest in the future. These assets are issued by companies, banks, financial institutions, and the government itself, which uses the bonds to raise funds.
They are called “fixed income” investments because the form of remuneration and term are defined in advance and do not change until the asset matures or is redeemed. This is the case with the well-known savings accounts, federal government bonds, and Certificates of Deposit (CDBs), which are among the most popular investments among peoples.
What is the difference between fixed income and variable income?
While fixed-income investments have a known return from the start, variable-income assets have unpredictable profitability . The “variable” in this case indicates the high volatility of assets like stocks and foreign exchange, which are constantly experiencing price fluctuations in the capital market.
Of course, these trends are evaluated by analysts and give investors some perspective on the return of variable income assets, but only fixed income guarantees the same form of remuneration from the beginning to the end of the investment. Therefore, fixed income is preferred by more conservative investors and should be present in any portfolio to preserve wealth (even for the most aggressive investors).
But this does not mean that fixed income has a guaranteed return, or that its final value does not vary, as we will see below.
Profitability of fixed income investments
Although the profitability of fixed-income investments is known at the time of investment, it is not always possible to calculate the exact returns of the asset. This is because there are pre-fixed, post-fixed, and hybrid securities.
Fixed-rate bonds
Fixed-rate bonds are assets whose nominal return is fixed , meaning they yield a specific interest rate and are not subject to any indicator or variable. These are the assets that allow you to calculate the exact amount you will receive at the end of the investment.
For example, if you buy a bond worth R$1,000 with a fixed interest rate of 6% per year and a term of 2 years, you can calculate exactly how much you will receive at maturity — approximately R$1,127.16 considering compound interest and without deducting fees and taxes.
Post-fixed securities
In post-fixed income securities, you only know the calculation of profitability, which is usually linked to a financial indicator. The basic example is the Selic Rate (the basic interest rate of the economy), which serves as a benchmark for several fixed income investments.
So, if you buy a Selic Treasury bond, for example, the return will be the invested capital plus the variation of the Selic rate during the investment period. In other words, your gains will depend on the behavior of the Selic rate. There are post-fixed assets linked to the Selic rate, CDI, IPCA, among other economic indicators.
Hybrid titles
Hybrid bonds combine fixed and variable returns to form their remuneration. One of the best known is the IPCA Treasury bond, which offers inflation variation plus a fixed interest rate — the IPCA Treasury bond maturing in 2035 pays IPCA + 4%, for example.
Therefore, you know that you will earn at least 4% on the invested amount plus the variation in the country’s main price index during the fixed-income investment period.
Risks of investing in fixed income
Despite the predictability of fixed-income investments, they also have their risks and variations. The most obvious is credit risk , since the payment of the bond’s returns depends on the issuing institution—and if the company or bank goes bankrupt, the risk of default is real.
However, this risk is easily minimized when the investor chooses reliable issuers, such as the federal government itself or well-rated companies (with high ratings). Furthermore, many fixed-income securities are covered by the FGC (Credit Guarantee Fund), guaranteeing up to R$ 250,000 per CPF (individual taxpayer ID) or financial institution in case of non-payment of the investment.
Furthermore, fixed income is subject to market risk , which is the impact of trading on the value of the securities. For example, if you buy a fixed-rate bond and interest rates start to rise, it loses market value.
Similarly, an inflation-indexed bond depreciates when the price index falls. Therefore, it is important to pay attention to these indicators and think very carefully before redeeming fixed-income securities before maturity.
Finally, there is liquidity risk , which is the difficulty in converting the security into cash when it is not widely traded in the market, as is the case with debentures. This problem can also be avoided by seeking assets with greater liquidity, which are easily sold or redeemed in a few days.
6 main fixed income financial products
There are several fixed-income investments available in the financial market, with different returns, terms, risks, and liquidity. Learn about the main ones.
1. Savings
Savings accounts are the most popular fixed-income investment in the country, preferred by 88% of americans, according to a 2019 survey by Anbima. Its rules are as simple as possible: there are no fees or taxes, money can be deposited and withdrawn at any time, and all you need is a bank account.
Regarding profitability, savings accounts pay 0.5% + Reference Rate (TR) when the Selic rate is above 8.5%, and 70% of the Selic rate + TR when the interest rate is below 8.5% .
In a scenario of historically low Selic rates and zero TR (reference rate), returns are extremely low and often below inflation — making savings accounts the least attractive investment , despite their popularity.
2. Fixed-income pension funds
Fixed-income pension funds are investment funds that allocate the majority of their resources to public or private securities. These private pension plans allow you to accumulate assets and then receive the money in the form of redemption or contracted income, with the advantage of tax benefits and professional portfolio management.
Among the benefits of these products are the absence of withholding tax, the possibility of income tax deductions (for PGBL plans), and the transfer of assets without probate.
3. Treasury Direct Bonds
The USA Treasury Direct program is a federal government program offering various returns, terms, and investment conditions. You can choose bonds that pay the Selic rate (Tesouro Selic), those linked to inflation (Tesouro IPCA), and fixed-rate bonds (Tesouro Prefixado), all with daily liquidity and the convenience of online investment.
Furthermore, they are among the safest fixed-income assets, since the government is the creditor itself. Regarding costs, the progressive income tax is deducted from earnings, along with a 0.25% stock exchange custody fee and, sometimes, a brokerage administration fee.
4. CDBs
A CDB (Certificate of Bank Deposit) is a private security issued by banks that can be pre-fixed or post-fixed. The most common are the post-fixed ones indexed to the CDI or another fixed-income benchmark — the famous 90% of CDI, 100% of CDI, and 110% of CDI.
The main advantage of these bonds is the coverage by the FGC (Deposit Insurance Fund) and options with high liquidity. On the other hand, there is income tax on these bonds following a regressive table, which has rates ranging from 22.5% (up to 6 months after the investment) to 15% (after 2 years after the investment).
5. Debentures
Debentures are debt securities issued by companies to raise funds for projects. Their maturity is usually longer than that of other fixed-income products – and the return can be pre-fixed, post-fixed, or a hybrid model.
These assets are not covered by the FGC (Credit Guarantee Fund) and are subject to income tax (with the exception of incentivized debentures that finance infrastructure projects). Furthermore, debentures are securities that can have low liquidity – meaning they are difficult to redeem before maturity.
6. LCI and LCA
LCI and LCA are acronyms for Real Estate Credit Notes and Agribusiness Credit Notes, respectively. They are private credit instruments that finance these two sectors of the economy, are covered by the FGC (Credit Guarantee Fund), and are not subject to Income Tax.
Because of this exemption , the return can be worthwhile when compared to other fixed-income securities. However, attention must be paid to liquidity, as the terms are longer, with a minimum lock-in period of 90 days.
3 situations where it’s worth investing in fixed income.
In seeking security
Security is the strong point of fixed income, despite the risks already detailed. Therefore, investors with a conservative to moderate risk profile allocate a good portion of their resources to these securities as a way to preserve their capital. It’s worth remembering that protecting part of your capital with low-risk investments is a good recommendation for any investor profile.
However, low risk also means lower returns , especially during times of falling interest rates — hence the need to diversify the portfolio and also include variable income assets.
When building an emergency fund
Before you start investing, it’s essential to build an emergency fund with enough money to cover 6 to 12 months of fixed expenses in case of unforeseen events. Since this money needs to be readily available, highly liquid fixed-income investments are ideal for maintaining the reserve and generating returns—preferably in government bonds or Certificates of Deposit (CDBs), which yield more than savings accounts.