Investing in fixed income products

Our recent article highlighted detailed features of fixed deposits as a fixed-income investment product. We have also discussed investment asset classes in detail because we noticed that many Ghanaians and Africans in general, do not know all the investment asset classes.

Again, according to Investopedia, “an asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations”. Fixed Income is one of many investment asset classes in the world.
What then is a Fixed Income investment asset?

A fixed-income security is a type of investment that represents a loan made by an investor to a borrower, typically a government, corporation, or financial institution. It is called a "fixed income" security because it provides a fixed stream of income to the investor in the form of periodic interest payments, usually at a predetermined interest rate and schedule. The principal amount is typically repaid to the investor at maturity.

Some examples of fixed-income securities include government bills, notes and bonds, corporate bonds, municipal bonds, commercial papers, debentures, certificates of deposit (CDs) / Fixed Deposits (FD), and certain types of preferred stocks.

These investments are considered debt instruments because the investor is effectively lending money to the issuer in exchange for the promise of regular interest payments and the return of the principal amount.

There are several reasons for investing, and in fact, your investment strategies must be in line with your investment objectives. By the way, do you have an investment objective? Do your investment objectives match the investment asset classes in your portfolio? Today, let’s discuss some of the reasons for electing fixed income as an investment asset in your investment portfolio:

Regular Income:

The first reason is the regular income derived from the investment. Fixed-income investments are often chosen by investors who seek a reliable and predictable stream of income. The interest payments from these securities are typically regular and known in advance, providing a stable source of cash flow.

Capital Preservation:

The second reason is capital preservation. For the most part, fixed-income assets are generally considered less risky compared to equity investments. They offer a more conservative investment approach that focuses on preserving the capital invested by the investor.

Government bonds, for example, are often considered low-risk investments as they are backed by the issuing government. In this case, the government of Ghana treasury debts have low risk even though there is a possibility of default just like what we are currently experiencing in Ghana.

Diversification

Diversification is the next reason for the use of fixed-income assets in the portfolio. Investing in fixed-income assets can help diversify an investment portfolio. Bonds and other fixed-income securities often have a different risk-return profile compared to equities.

By adding fixed-income assets to a portfolio that also includes stocks and other investments, investors can potentially reduce the overall risk and volatility of their portfolio.

For Risk Management:

The fourth reason is purely for risk management purposes only. Fixed-income securities can provide a degree of stability to a portfolio during periods of market uncertainty or volatility. In times when equity markets are experiencing declines, fixed-income investments may act as a buffer and help mitigate losses in the portfolio.

Protection Against Inflation:

Preserving purchasing power of one’s investment is an important reason. Inflation erodes the purchasing power of your money over time. Fixed-income securities, especially those with interest rates that are higher than the inflation rate, can help investors preserve their purchasing power by generating returns that outpace inflation.

Unfortunately, we are currently experiencing negative real returns due to the fact that the inflation rate in Ghana is higher than the interest rates. However, it is still better to invest and get some returns than nothing. As the saying goes “Half loaf is better than none”.

For Retirement Planning:

The final reason for the use of fixed-income assets in the portfolio is for retirement planning purposes. Fixed-income investments are often favored by individuals planning for retirement or those seeking to generate a reliable income during their retirement years. Regular income payments from fixed-income securities can help meet ongoing expenses and provide financial stability in retirement years.

Once again, it's important to note that while fixed-income securities are generally considered less risky than equities, they still carry some level of risk. Every investment asset has its level of risk, and we must be mindful of these different types of risk and their impacts on our investment. For example, factors such as interest rate changes, credit risk, inflation, and economic conditions can impact the value and returns of fixed-income investments.

Therefore, it's crucial to carefully evaluate the creditworthiness of the issuer and consider the specific risks associated with each investment before making investment decisions.

For a deeper understanding of this subject and further assistance kindly contact EcoCapital Investment Management Ltd., at +233(0)50 155 3502.

EcoCapital Investment Management Limited (EIML) is a company incorporated in Ghana, and licensed by the Securities and Exchange Commission (SEC) as an Investment Management firm, and by the National Pensions Regulatory Authority (NPRA) as Fund Manager of both second and third tiers pension schemes.

The corporate mandate of the firm is to provide premium financial solutions and investment management services to both retail and institutional investors in Ghana. Services on offer at EcoCapital include Wealth Creation and Management, Investment Portfolio Management, Pension Fund Management, Mutual Funds, Retirement Planning, Investment Research and Advisory.

The firm has three mutual fund products under management, namely; EcoCapital Prime Fund, EcoCapital Nordea Income Growth Fund, and EcoCapital Weston Oil & Gas fund.