Fixed income explained in a quick and easy way

Fixed income stands out for being a low-risk investment, and it is also easy and simple to purchase. Read the text and find out more!

Investments in fixed income are among the favorites of investors of any level. 

With this alternative, the investor knows approximately how much they will receive at the end of the redemption, which is why people feel more comfortable investing in their assets.

In today's text you will discover more details about this investment model: what it is, how it works, advantages and much more!

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What is fixed income and how does it work?

A fixed income It is a type of investment in which it is possible to negotiate the profitability at the time of the contract. 

In other words, you make your contribution knowing approximately how much you will receive when the product matures and is redeemed. 

It stands out for its security and guaranteed profitability. There are different types of investments in fixed income and each of them has distinct characteristics as well. 

Products can be issued by banks, companies, financial institutions and even the Government.

In addition, securities can be contracted with post-fixed or prefixed interest rates. There are also asset models that follow a hybrid model.  

See below how each type of interest works:

#Prefixed interest

Investments governed by this interest model are predictable, as the interest is fixed. This means that the investor will know the profitability of the asset until the time of redemption.

#Post-fixed interest

In this alternative, the remuneration is linked to some reference index, for example, the Selic rate or the CDI rate.

The investor knows what the indicator is, however, he does not know exactly how much he will receive until the time of redemption, as the rate may vary.

#Hybrid interest

In hybrid securities, there is a combination of pre- and post-fixed investments, meaning that part of the remuneration is linked to pre-fixed interest, while the other part is linked to an index that may vary over time.

How does your profitability work?

Calculating the profitability of investments in fixed income are linked to determining indexes. The profitability of each investment varies according to the index to which it is linked. 

For example, the Selic Treasury uses the Selic rate as its profitability index. CDBs, in turn, use the CDI rate as a reference index.

In addition to these two rates, the IPCA, IGP-M and the reference rate also serve as reference indexes for investments in RF.  

What are the types of fixed income?

In short, this investment model is currently classified considering its issuer. 

Therefore, the types of investments in this category can be issued in public securities or private securities. 

See below which investments are present in each category:

Public securities

These are bonds issued by the government and are quite safe. The investor lends money to the government and receives the money plus interest. 

They are:

1. Direct Treasury Bonds

So far, there are 5 public titles available on Treasury Direct, Treasure:

1. Selic;
2. Prefixed;
3. Pre-fixed with semi-annual interest;
4. IPCA+;
5. IPCA+ with semi-annual interest.

Each of these securities has specific characteristics and different profitability factors. 

Private titles

Private bonds are issued by companies, banks and financial institutions. In this case, money is lent to these institutions. 

There are diversified private securities on the market that meet different investor profiles, terms and objectives. 

They are:

1. Savings;
2. CDBs;
3. Debentures;
4. LCI and LCA;
5. Bill of exchange;
6. CRI and CRA;
7. Fixed income funds.

Savings and CDB are two investment models in fixed income very popular among investors. 

Other than that, they are simpler and more practical to invest in. 

What are the advantages of investing in Fixed Income?

This investment model brings some advantages to investors, including even the most daring ones investing in assets of fixed income aiming to diversify your portfolio and reduce risks. 

The first advantage to stand out, which even alludes to its name, is the fact that it is predictable. 

The investor can monitor the behavior of the securities and know approximately how much the profitability will be at the time of contracting.

Despite this security, it is not risk-free, but it still gives the investor an idea of what to expect.

Another interesting advantage for Brazilians is the variety of products available on the market. 

Each product has very specific characteristics and meets different investor objectives and profiles.

This way, you can diversify your portfolio and distribute your investments across different products. 

Still talking about the advantages offered by assets in fixed income, we can highlight its liquidity. 

Most of the investments that make up this category have daily liquidity, for example, CDBs and Selic Treasury.

This way, the amounts can be redeemed at any time, in case of urgency or need, so they are good alternatives for emergency reserve.

Finally, another advantage that we could not fail to highlight about this investment model is its ease of contracting.

Even beginner investors can choose, apply and withdraw their investments in just a few clicks, very easily, quickly and conveniently.

Disadvantage 

The main disadvantage of this modality is linked to its main advantage. Because it is predictable, its gain is stable, that is, it has less risk. 

However, when it comes to investments, we know that instability can work in our favor and give us a high return immediately. 

Therefore, for investors who like to take risks, the ideal is variable income. 

Another disadvantage that we can highlight, which, in fact, is also linked to one of the advantages presented in the previous topic, is its liquidity.

Liquidity involves a risk when it comes to fixed income, because it has an expiration date.

For example, if you invest in a CDB with daily liquidity and a 5-year term, but need to withdraw the amount before the term expires, you may lose money on this action.

Therefore, experts always emphasize the importance of diversifying your investment portfolio.

It must contain different titles and with different maturity dates as well. 

Furthermore, both parties need to agree on their goals, whether they are short, medium or long term, otherwise you could lose money whenever you need to redeem a bond early.

In the case of bonds without FGC coverage, the investor also faces the disadvantage of credit risk, should the financial institution go bankrupt. 

To finish talking about the disadvantages, we would like to mention the fees and taxes involved in this investment model, for example, IOF, IR, administration fee and custody fee.

The ideal is to look for institutions that charge fewer fees so that the investment is less affected. 

How to invest?

If you want to become an investor by making your first contributions in fixed income, first of all, you need to choose a bank or financial institution. 

Next, you must choose an investment model according to your objectives. Brokers and banks usually carry out an investor test to find out what your profile is and recommend the best investments. 

Once you choose the ideal investment, make your first contribution and continue making monthly contributions until you achieve your goals.

Before choosing the title, be sure to compare and observe its liquidity, grace and redemption period, taxation, expected profitability, guarantee of FGC and also whether the company is trustworthy.

This way, you can invest transparently and not have any unpleasant surprises during the process.

Also, check the fees charged by your bank or financial institution. There are many alternatives on the market with competitive rates.

If you feel really lost, you can simulate the returns on your investments with a fixed income investment simulator. 

Among the companies with the best simulators on the market, we find, for example:

• Toro Investments;
• Mobills;
• Monetus;
• Treasury Direct;
• XP Investment;
• NuInvest.

With these simulators it is possible to compare market products, assess risks and see approximate profitability.

A big advantage is that they are easy and simple to use, by providing some data about your possible investment you can get detailed and easy to understand information.

From there, you can choose the best investment alternative for you. 

Is it worth investing in fixed income?

This investment model has many advantages that make it a good investment option to have in your portfolio. 

However, as every investment offers some type of risk and one of its advantages is the variety of products, take advantage and diversify your portfolio.

This way, you increase your assets, diversify your portfolio and reduce risks. If you are a more conservative investor, investments in fixed income are great alternatives for you. 

So the answer is simple: It is worth investing in fixed income!

Nonetheless…

Allocate only part of your capital to this investment model, the other part should be allocated to riskier investments, but with greater profitability, such as investments in variable income.

Conclusion

In this text you have found enough information to start investing in fixed income and choose the best product.

However, you can expand your knowledge on the subject by checking out our separate articles on products that make up this type of investment, for example: What is the best institution to invest in Tesouro Direto?

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