A: Fixed interest investment (such as bonds) are generally lower risk than equity investments – and that is why they pay a lower return. They are not riskless, however.

 

On a “mark to market” basis, if interest rates rise, prices of fixed interest securities fall. If interest rates fall, prices increase. That is why if you have been an investor in a fixed interest fund over the last six months, you have seen the value of the investment go up because interest rates have come down.

 

If you hold your bond till maturity, you should get the face value of the bond ($100) back. However, not all borrowers are capable of repaying and some default. This is known as credit risk. Bonds issued by governments, state governments and banks are typically very “safe”, and that is why the interest rate they pay is so low. Bonds issued by investment grade corporations are relatively safe, while others are less safe and hence pay a higher interest rate.

 

One way of investing in fixed interest securities is through an exchange traded fund (ETF). There is no issue with liquidity.  Vanguard’s VAF or iShares IAF may be worth considering.