Fixed Return Securities Compared To High Return Mutual Funds
When it comes to investment returns, there are two kinds of vehicles: fixed income and non-fixed income. In fixed income securities, the investments pay off a steady return over the maturity length of the product. For example, a 10 year bond pays out over the span of 10 years in a steady fashion. In contrast, a non-fixed income security like a mutual fund pays off irregularly according to the fluctuations in its price.
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.
When trying to make a choice between either kind of investment, investors will come across a rate of return. In the fixed income case, this has real meaning in that the payout will be annually at the rate of return. But in the non-fixed income case, this is merely a guess based on historical returns calculated over some time period. Top mutual funds advertise high returns but these rates are not guaranteed. Investors should be careful not to depend too strongly on this number holding long in the future.
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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