Fixed Interest investments are also known as debt securities and they have a fixed rate of interest payable. Typically, an investor lends their money to an organisation, such as a bank, in return for a fixed return to be payable set at a future date. Fixed Interest investments tend to be low to medium risk for Australian Fixed Interest and medium to high risk for International Fixed Interest (known as International Bonds).
Examples of Fixed Interest Investments include:
- Term deposits.
- Commonwealth government bonds & debentures;
- Semi government bonds & debentures;
- Corporate bonds & debentures;
- First & second mortgages
Term deposits are deposits with a bank, building society or credit union for a specified period of time and in return, the investor receives a fixed rate of interest for the duration of the deposit. This rate is known prior to the deposit being made. Term deposits can range from one month to five years in duration.
Bonds are issued by government and semi-government bodies in Australia and overseas. You can invest in a bond from one to thirty years in duration and at maturity, the borrower will return the money to the investor plus interest.
Managers who invest in mortgages are seeking to produce income only through lending of money on the security of first mortgages. Income is usually fully taxable.
Mortgage trusts normally lend up to 66% of sworn valuation of property and in some cases may insure the mortgages as well. They will also maintain some funds in short term money market instruments to meet withdrawals and while waiting to lend. There is not usually an entry fee to these trusts but there is often an exit fee in the early years of an investment.
Mortgage trusts can be a sound source of income as part of an investment portfolio. Income can be paid monthly, quarterly, half yearly or annually depending on the rules of each trust. In a falling interest rate market they can maintain higher rates of interest than other investments for some years. Conversely in a rising market they may produce lower rates. Timing is therefore important in selection of this investment.
Risk level is higher than most other fixed interest investments but is commensurate with the returns offered.
It is important to note that fixed interest via a managed fund is different to direct fixed interest. These are essentially 2 different products.
Advantages of Fixed Interest Investments:
- Are easily accessed by investors.
- Provide the investor with a certain income amount over the term of the deposit/investment.
- Are very low risk investments and the risk of losing capital is very minimal.
Disadvantages of Fixed Interest Investments:
- An interest rates rise after you purchase the investment generally means there is a fall in value.
- International bonds are affected by currency fluctuations.
- Investment is locked in for the full term, otherwise there are penalties for an early exit.
For more information on fixed interest, contact us to arrange a free initial interview.