How does fixed income investing work?

Discover once and for all how fixed income investing works!

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After all, how does fixed income investing work? This question is very common among beginner investors.

But in fact, anyone who wants to take care of their money and invest safely should learn more about this investment category.

Currently, leaving money in savings is not the best way to make your money grow, as there are other safe investments that offer more advantageous returns.

Throughout this content, you will understand how fixed income investing works and what the best applications on the market are.

Want to know more? Then keep reading.

What is fixed income?

Fixed income is an investment category that has a pre-defined return calculation.

When purchasing a fixed income security, you are lending your money to the issuer of the paper, which could be the government, a bank or a company.

In return, on the established date, you will receive your money back plus interest.

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Profitability: how does fixed income investment work?

There are three most common profitability calculations, which are fixed-rate, post-fixed, and hybrid securities.

• Prefixed profitability: When you purchase a fixed-rate bond, you will know exactly how much you will receive at maturity. For example, a yield of 8% per year.

• Post-fixed profitability: In this type of investment, the return is linked to an economic index, such as the Selic or the CDI. This means that the investor will not know exactly how much he will receive when the bond matures, since the indicators vary over time.

• Hybrid profitability: This case combines the characteristics of fixed-rate and post-fixed securities. Therefore, part of the profitability will be fixed and the other part will follow an economic index, such as the IPCA (X% + IPCA), for example.

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What is the difference between fixed income and variable income?

Fixed income investments have defined profitability and maturity criteria.

Furthermore, they are safer, since most investments are protected by the Credit Guarantee Fund (FGC) or the National Treasury, which is the case of public securities.

Therefore, fixed income is recommended for beginner investors, who do not have much experience, and for more conservative investors, who prioritize security when investing.

Investments in variable income, on the other hand, are not predictable and fluctuate according to the market, which is influenced by various types.

In other words, returns are unpredictable at the time of investment, as prices can fluctuate according to economic and political factors.

For this reason, variable income is recommended for more daring investors, who are willing to take risks in exchange for high profitability, especially in the long term.

The main investments in variable income are shares, equity funds and real estate funds (FIIs).

What are the main fixed income investments?

Fixed income is an investment category that includes several types of financial products. The main ones are:

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1. treasury direct

Tesouro Direto is a program created in 2002 through a partnership between the National Treasury and B3, the Brazilian Stock Exchange.

This investment works like a kind of loan that you make to the government.

In exchange, the government offers you a bond with a defined maturity date. At the end of that period, you will receive your money, plus interest.

One of the main advantages of Tesouro Direto is security, as it is 100% guaranteed by the National Treasury.

Furthermore, it offers good profitability and is considered a very accessible investment, since with just over R$ 30, you can already buy Treasury Direct bonds.

There are three types of Treasury Direct bonds: fixed-rate, post-fixed and hybrid.

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2. Bank Deposit Certificate (CDB)

CDB is a fixed income investment issued by banks.

It works in a similar way to Tesouro Direto. The difference is that here, we are talking about private bonds.

When you buy a CDB bond, you will be lending your money to the financial institution.

Banks issue these securities with the aim of raising funds to finance certain activities, such as projects, for example.

Typically, CDBs issued by smaller institutions tend to offer more attractive rates of return, and bonds with a longer maturity term tend to offer better profitability.

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3. Fixed income funds

Fixed income funds are investments that raise funds through shares and invest in a portfolio of fixed income assets linked, for the most part, to the interest rate or inflation.

They basically function as a condominium of investors in which each shareholder owns a fraction of the total assets.

Investments can only be made in fixed-rate or post-fixed securities. This means that depending on the type of fund, the investor may invest in Treasury Direct bonds, debentures, CDBs and/or LCI/LCA.

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4. LCI and LCA

Real Estate Credit Letters (LCI) and Agribusiness Credit Letters (LCA) are two fixed income investments exempt from Income Tax.

They are recommended for investors who prioritize security and want to obtain a return close to the Interbank Deposit Certificate (CDI).

LCI resources are allocated to the real estate market, and LCA resources are allocated to agribusiness.

The yield varies from case to case, but the bonds can be prefixed, post-fixed or hybrid.

Like CDBs, letters of credit are also protected by the FGC.

The main advantage of LCIs and LCAs is the exemption from Income Tax. This means that all the profitability obtained is already liquid.

Conclusion

Now you know how fixed income investing works and the main financial products in this category.

We are talking about safe investments that offer more predictability.

But before making investments, it is important to study to see which investments are most aligned with your financial goals, as each of them has certain characteristics.