Fixed income funds invest in the debt that governments, public administrations and national or international companies issue to finance themselves, such as bonds, debentures, corporate debt and so on.
Depending on the issuer, fixed income may be public or private.
- Public fixed income refers to the debt issued by central or regional governments and other public bodies to finance their spending. It takes the form of sovereign debentures, treasury bills and bonds.
- Private fixed income refers to the debt issued by companies to raise capital or carry out certain projects. In this case, the issue is carried out in the form of company promissory notes, debentures in private companies and bonds. In view of their characteristics, these funds are suitable for investors with a conservative profile. However, we must explain exactly what is meant when we use the word “fixed”, because it can be quite misleading. In this context, “fixed” refers to the commitment to maintain an investment for a specific term. It does not mean that the investment yields a fixed return.
Based on their maturity period , funds that invest in fixed income will usually include short-term funds (with an average duration of less than three years) and medium-long-term funds.
- The short-term funds invest in the money markets and have a maximum maturity of 18 months and very high liquidity. The main instruments purchased in these markets are company promissory note and treasury bills.
- Medium and long-term funds invest in the capital markets and have a maturity of more than two years. A longer duration implies a higher expected return but also a greater risk potential. These markets mainly offer bonds and debentures from public administrations and private companies.
Another criterion for classifying fixed income funds is the yield they offer. The different classes are as follows:
- Implicit yield fixed income, also known as zero coupon, refers to products whose return is determined by the difference between the price paid by the investor and the price at the date of redemption. There is only one interest payment for these products and it is made at the date of redemption.
- Explicit yield fixed income refers to products where the investor receives regular payments in the form of interest (coupons). The frequency of payments is established at the date of issue, but it is usually half-yearly or annual.