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Fixed income has consistently been one of the preferred investment options for Brazilians due to its high interest rates, making it appealing to conservative investors.
In recent months, there has been a reduction in the basic interest rate (SELIC), decreasing from 2.25% annually to 2% annually.
If you typically invest in fixed income and are unsure about the possibility of getting a good return in the current economic situation, this article is aimed at you.
We will explore how investing in fixed income operates and if it is still feasible to invest in it.
What does Fixed Income refer to?
Fixed income investments are recognized for their reliable returns and are often chosen as the initial investment option for individuals building an emergency fund or starting to invest.
Fixed-income investments, like government and corporate securities, offer a steady and dependable income stream with relatively lower risk compared to other investment options.
Fixed-income investments, along with stocks and mutual funds, form the foundation of a diverse investment portfolio.
The CDI is the most widely used benchmark in fixed income, which can either have a fixed monthly rate or track a specific index.
- The Selic rate.
- the CDI;
- Inflation or similar issues.
Selic Rate: What does it mean?
When the Selic rate increases, the return on conservative products also increases, but when Selic decreases, the yield on fixed-income investments decreases as well.
Understand the functioning of fixed income.
Every investor, whether experienced or not, is constantly seeking the most lucrative investment opportunity.
Fixed income, often viewed as a straightforward investment option with diverse opportunities, conceals certain aspects and risks that could result in poor decisions if not understood by investors.
Fixed-income investments are typically called that way because they aim to produce a set amount of interest income. Examples of such investments are Treasury bonds, government and agency securities, municipal bonds, corporate bonds, and stocks.
Fixed income investments involve predictable profitability for the investor, whether through pre-set intervals or not, without being affected by fluctuations in asset value.
There are various kinds of fixed income applications distinguished by their goals, risk levels, issuers, and returns.
Discover which fixed-income investments are currently trending.
- CDB document.
- Treasury Department.
- LCI and LCA;
- Exchange Letter.
- CRI/CRA;
- Saving is considered one of the least profitable investments in fixed income.
Fixed income securities
To demonstrate its functionality, let’s analyze a prevalent form of fixed-income investments known as bonds.
Titles represent a temporary investment in which a company or government pays interest and the principal amount back at the end of a set time period.
If you purchase a 10-year bond for $5,000 with a 3% interest rate, you will receive $150 annually for 10 years. The interest payments can be made monthly, quarterly, or semi-annually. At the end of the 10 years, you will have earned $1,500 in interest in addition to the $5,000 principal repayment from the government.
Attributes of fixed-income securities
Fixed-income securities possess key characteristics that attract investors.
- Diversification.
- Capital preservation.
- Income generation.
- Possible advantageous tax treatment.
Each feature offers a unique range of advantages that differ based on the specific fixed income security.
High-quality credit securities, such as fixed-income assets, can mitigate the volatility of a stock portfolio.
Historically, stock prices and securities have a tendency to move separately.
Diversifying your investment portfolio with securities does not ensure profitability or provide protection against losses during a market downturn, so it is important to carefully weigh the advantages and disadvantages.
Fixed income securities are a great option for those focused on safeguarding their capital.
Fixed income securities are securities that provide a steady stream of income to investors.
Investing in fixed income involves more than just bonds. It can also encompass preferred shares and bank deposit certificates.
Many investors will hold bonds as their primary fixed income assets.
Public fixed income securities consist of:
- National Treasury Notes abbreviated as NTN.
- Central Bank Bonus from BBC
- Agricultural Debt Titles (ADT)
- State and local government positions.
Private fixed-income securities include those issued by private institutions or companies operating under private law.
- Exchange Correspondence (LC);
- Bank Deposit Certificates (CDB) are certificates for depositing money in a bank.
- Bank Deposit claims (RDB) can be requested.
- Debt securities.
Is it advisable to invest in fixed income despite the declining Selic rate?
Before the interest rate Selic falls, investors must acquire knowledge in choosing the optimal fixed income options, which necessitates a solid financial education. Hence, it is essential to delve deeper into fixed income and variable income investments.
You might have considered moving away from fixed income, but I caution you: panicking or thinking that fixed income is no longer relevant, as some have suggested, is not necessary.
Despite the Selic rate decreasing, fixed income investments will continue to be a valuable asset for long-term wealth building, especially for novice and risk-averse investors.
Fixed income investments provide a known and predictable return, with the rules for the return established upfront, either through fixed interest rates (pre-fixed) or rates linked to an indicator (post-fixed).
Is it beneficial or detrimental to invest in fixed income?
Most traditional fixed-income investments provide easy access to money, offering immediate liquidity or within a few days, making them a useful option for individuals looking to build an emergency fund.
Conservative investments linked to Selic or DI rates are currently yielding lower returns. This includes options such as savings accounts, DI funds, CDB, LCI, LCA, and Selic Treasury. Thus, these investment choices are not recommended for wealth accumulation given the reduced Selic rate.
In times of low interest rates, debentures can be more lucrative than other fixed income choices.
Debentures, seen as advanced products, have gained attention and appeal among individuals, despite the increased risk involved.
Instead of funding the government, those who purchase debentures provide loans to companies for various purposes such as expanding operations, making investments, or managing finances.
Debentures offer higher returns than traditional fixed-income investments, serving as a valuable diversified investment option that can lower risks and enhance profitability.
Considering diversifying your portfolio can help reduce risk and minimize fluctuations in your investment journey, especially when low interest rates make fixed income less appealing.
We recommend understanding your investor profile to boost investments in variable income products, while also keeping an emergency fund in fixed income and diversifying some investments based on desired returns, such as real estate, stocks, and other options with higher risks.
Summary
Even the top-performing investments offering high returns and security, such as those yielding close to 100% of the CDI, are now providing significantly lower returns. The expectation of conservative investors earning 1% per month with minimal risk is no longer as achievable.
When choosing to invest in something, you may be concerned about missing out on other potential opportunities and the associated risks of not maximizing profitability.
An expert is the recommended point of contact for assessing investment risk.
There are many different ways to diversify, and there is no set rule for achieving a good balance.
Financial education is crucial for making informed and wise choices regarding your personal finances, as mentioned earlier.
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