Fixed interest - worth a closer look
With fixed interest investments, you lend money to a government or related entity, or to a public company. In return, they pay you interest. Examples of fixed interest investments include government and corporate bonds.
Despite their compelling historical record, Australians tend to pay relatively little attention to bonds and fixed interest investments. Yet these can play an important role in a diversified portfolio, particularly when there's uncertainty in financial markets.
Over the 25 years to the end of September 2011, fixed interest bonds provided a better average return than cash (such as bank deposits), listed property investments and Australian and international equities. While property and share markets experienced dramatic rises and falls, high-quality bonds and other fixed interest investments yielded an average return of 9.7% per year, exceeding Australian shares' 9.2% average.
You can invest in fixed interest through a managed fund, an index fund or corporate bonds. A range of other investments pay a fixed rate of interest, but do not always have the 'investment grade' rating of good quality bonds and fixed interest. These riskier investments include some unlisted debentures, unsecured notes, unlisted mortgage funds and mezzanine investments. It is very important to understand the distinctions, and to know what you're investing in.
Notes
Australian bond performance is based on the UBS Warburg Australia Composite Bond Accumulation Index (since September 1989) and Commonwealth Bank All Series Greater than 10 years Bond Accumulation Index (before September 1989). Australian shares performance is based on the S&P / ASX All Ordinaries Accumulation Index. Figures do not take account of fees, costs, taxes or currency movements.
Last Modified: Monday, 19 December 2011