Retirement funds and bank accounts, with their falling returns, can no longer guarantee a secure life after retirement. People have become wary of relying on traditional investment options for supporting themselves after what transpired during the financial crisis. An alternative is fixed income investments, which allow you to strike a good balance between risk and return.
The most popular form of fixed income instruments is bonds. Their returns are usually better than that of bank accounts and traditional retirement funds. They are less risky than stocks, but riskier than bank accounts. The risk is that the organization, which has issued the bond, could go bankrupt and default on its obligations. Don’t invest in bonds if your retirement date is coming close. But if you are young, you should keep a part of your income in carefully selected bond investments. Here are the key options available to you if you are looking to invest in bonds.
Treasury Bonds
If you are looking for an investment in the fixed income market without taking much risk, the best option is Treasury bonds. Economic crisis or not, you are pretty much guaranteed to receive your principal and interest. These investments are backed by the Federal government, and there is perhaps no safer investment in the world for a retail investor than U.S. Treasury bonds.
Municipal Bonds
Another reasonably safe option is to invest in a bond floated by a municipality. There are two categories of municipal bonds:
General obligation bonds: Where you get returns from the tax revenue generated by the local municipality.
Revenue bonds: Where you get returns from revenue of some specific project. These are riskier than general obligation bonds, but they usually offer higher returns to investors.
Corporate Bonds
The third alternative in the fixed income market is corporate bonds and bond funds. They offer better returns than both treasury and municipality bonds, but they also involve greater risk. There is a much higher chance of a company going bankrupt than a government. When the company fails, you might lose the whole amount of your investment. However, a good option in this category is short-term investment-grade funds, which are made of bonds that have the lowest chance of default.
An important strategy that you can follow when investing in fixed income options is to build an investment ladder by buying bonds of different maturity dates. This will give you access to your funds, while most of your money will remain invested in high interest paying bonds.