May 29, 2011
Fixed Income Products Versus Top Mutual Funds
Investors have a choice of two kinds of investment vehicles: fixed income and non-fixed income securities. The first is a financial instrument that gives reliable returns over the lifetime of the instrument. The second does not have an intrinsic return but rather fluctuates in value according to some underlying entity – often mutual funds or individual stocks for companies.
Fixed income securities tend to produce steady but low returns. They are good for people who are risk averse, such as retirees who have stopped working and must rely on a constant stream of returns on their savings. Non-fixed income securities tend to produce erratic but higher returns. They are good for people who are either younger or who like to see more money come in from their investments.
In either type of security the advertised rate of return will be stated as a percentage amount mostly likely in annual terms. For fixed income securities, this rate is exact that: fixed. Inflation may play some role in reducing the effective return but this will be true of any income. For non-fixed income securities, the rate is merely a reflection of historical numbers and may not hold in the future. Top mutual funds may have paid out well but cannot guarantee such a thing later on.
Let us look at three kinds of fixed income or near-fixed income investment products.
Personal investors who are curious about fixed income securities should check out the money market account. Such accounts are invested in mostly very short term instruments. A money market deposit account may be located at banks and related financial institutions. They are insured by the FDIC. Do not conflate the deposit account with a similarly named money market fund which are portfolios of such instruments, and thus not protected by the federal government.
A type of fund that is not strictly fixed income but is close is the conservative Ginnie Mae mutual fund. In the time of the economic crisis initiated at least partly by the real estate meltdown of 2007, Freddie Mac and Fannie Mae exhibited massive drops in revenue forcing a statement from the Federal government to head off financial panic. GNMA funds found itself was in a vastly improved position, exhibiting little sign of being in need of a Federal government-mediated bail-out.
Government bonds can be bought by citizens. Bonds are sold when the government needs money to finance its operation before enough taxes are collected to reward employees. This kind of financing cannot be done using a typical bank, but needs to involve the auctioning of bonds that are promises of repayment. Individuals, corporations and even nations invest in bonds issued by the United States government on account of historical performance and vigor of the U.S. industry.
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