Fixed income investing offers investors several fundamental benefits: diversification, income, and tax advantages. Fixed income reduces the risk of an all-stock portfolio while supplementing other income resources. Diversification helps to lessen volatility in your portfolio. Fixed income dividends help supplement other income sources. Additionally, some fixed income investments are exempt from federal and/or state income taxes.
Fixed income investments are a necessary component of a portfolio that is diversified across different asset classes. Traditionally, bonds have returned more than cash investments, and exhibited less unpredictability than stocks. Also, the return on bonds has often compensated for the negative return on stocks during periods of market recession. Consequently, adding bond investments to an all-stock portfolio generally lowers your overall risk.
Many investors, notably retirees, seek ways to generate additional income from investments to supplement their existing income. In conclusion, fixed income investments are one way to achieve this goal.
The interest income generated by fixed income investments issues by state, federal, and municipal governments, is exempt from federal and/or state income taxes. Also some municipal investments generate interest income that is also exempt from the federal Alternative Minimum Tax which generally only affects investors in the higher federal income tax brackets.