A:

For the majority of younger investors, taking on risk within a portfolio in return for higher returns is the norm. Because investment funds are not needed in the short- or mid-term, volatility is less of a concern and focus is placed appropriately on long-term growth. Investors who are near or in retirement or individuals who have a much lower appetite for risk, however, have a penchant for principal protection as well as steady income from assets. Fixed income securities provide a method to achieve these two goals consistently, but not all fixed income options are created equal in terms of safety.

Cash and Money Markets

Assets held in cash or money market accounts are considered to be the safest options for any investor due to the fact that funds are insured up to a $250,000 limit. The principal balance of savings, checking and money market deposit accounts does not fall below total deposits made to the account, and interest rates are stated clearly, although they may shift each day. These investments are considered to be free from market and liquidity risk, but they do bear the risk of not keeping up with inflation.

Certificates of Deposit

Investing in CDs is also a safe option for investors seeking principal protection and steady income. Most CDs are offered by banks or credit unions, affording investors the same FDIC or NCUA insurance as cash and money market accounts. CDs can be purchased in terms ranging from six months to 10 years. The interest rate offered on a CD is based on the term selected, although it is only slightly higher than that offered by other bank products. No market risk exists with this investment option, but liquidity and inflation risks can be problems.

Individual Bonds

The most common fixed income investment comes in the form of individual bonds, including corporate, treasury and municipal offerings. Each individual bond investment allows investors the opportunity to lend their assets to the issuer of the bond in return for a stated interest rate paid out over time. Corporate bonds bear the most market risk, as companies issuing debt securities have the potential to go bankrupt causing a default on bond issues. Investors could lose some principal and forfeit future income from interest payments.

Municipal bonds are safer than corporate bonds but still carry more risk than government issues. State agencies, counties and other municipalities offer these types of bonds as either revenue or general obligation issues. Revenue bonds are backed by specific project revenues and therefore bear more risk than general obligation bonds which are backed by the taxing power of the issuing municipality.

Government or Treasury bonds (T-bonds) are considered the safest of all bond issues as they are backed by the federal government. Because of their low-risk profile, Treasury securities pay investors the lowest amount of interest.

Bond Funds or ETFs

Investing in fixed income securities can be done through mutual funds or exchange-traded funds (ETFs) in lieu of or in supplement to individual bond purchases. Both bond funds and ETFs provide diversification to investors as they hold numerous issues within a single fund, and they may reduce liquidity risk as underlying bonds mature on a rolling basis.

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