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Why invest in fixed income?
Fixed income is sometimes seen as rather safe and boring. While these attributes may be unattractive in equity bull markets, they are much more fashionable in troubled economic times. Debt markets emerged out of the foundation of the Bank of England in 1694. Their longevity through dozens of economic cycles is testament to their soundness; the British government, for example, has never formally defaulted on its debts.
There are a number of good reasons to invest in fixed income.
Stability of income
The primary purpose for investing in fixed income is for its income-producing qualities. Government bonds offer the greatest stability as they rarely default on their interest payments. Companies are more likely to default - especially riskier high-yield issuers - but investors are typically compensated for this with higher levels of income.
Bonds provide an excellent counterbalance to equities in a multi-asset portfolio. Your clients can reduce investment risk in their portfolios by adding fixed income, due to the low correlation between the two asset classes over the long term.
Fixed income is less risky than equities. Investors are less likely to make a loss on their original investment, while day-to-day fluctuations in bond prices are typically lower than in equity markets.
Diversity within bonds
Fixed income is a broad asset class that comprises a wide range of vehicles: gilts, non-UK government bonds, investment grade corporates, high-yield, emerging-market debt, municipal bonds, inflation-linked bonds and so on. Different factors influence the performance of each bond type, providing diversification within fixed income as a whole.