Invest in fixed income: can we lose money?

Invest in fixed income: can we lose money?

One of the classic myths surrounding fixed income investment products is that their profitability will always be positive and that, therefore, money can not be lost. Dear saver, nothing is further from reality. Investing in bonds, bonds and bills may end up reporting a negative return. Something that many Spaniards do not know, concretely almost 40%. A recent study conducted by the comparator HelpMyCash.com reveals that 39.4% of respondents believe that fixed income products can not give a negative return. But the truth is that yes. Let’s see why.

Image result for investmentThe myth of fixed income products

Before continuing, we must clarify that if a fixed income product is hired, for example a bonus, and it is maintained until the expiration date, at the end the amount determined at the time of signing will be received and it is understood that this will be positive, since that logic invites us to think that if we hire an investment product it is to earn money. The only obstacle that we could have in this sense is that the issuer of the debt incurs a default.

However, during recent years we have seen government debt issues at negative rates , which means that those who have gone to the placements and keep the bonds, bills or obligations to maturity, will end up having less money than they had when they subscribed .

So, lesson number one: even keeping a fixed-income product until maturity, profitability can be negative.

The tyranny of the market

Image result for investment

In addition, if the investment instrument is sold before the expiration date, it can also end up recovering less money from the investment. The reason? We will be at the mercy of the market. At this point it is necessary to clarify that the opposite could also happen, and that the profits increase.

If you want to liquidate fixed income products before maturity, the value of the debt will be that dictated by the market and could be lower or higher than the purchase price, depending on the demand and other variables. For example, if you subscribe a bond with a return of 5% and after a couple of months there is a new bond issue, but with a return of 10%, our bond will lose value, as investors will prefer to buy the bond to 10%. On the contrary, if the new bond issue is launched with a lower return than our title, the bond that we have purchased will be more profitable for new investors.

Interest rates can also impact fixed income. In general, it is assumed that when rates rise, the impact on fixed income is negative, while if they fall, the consequences are positive. It will also affect the ratings rating agencies have made the issuers. The worse it is, the greater the risk of default and vice versa.

Lesson number two: if you sell a fixed income security, you will have to assume the market price you have at that time.

What about the funds?

Finally, we must not forget the investment funds that invest in fixed income. They are not foreign to the market and, therefore, could also suffer negative returns. It is important to highlight this point because, sometimes, they are a refuge for the most conservative and they do not always know that they may end up losing money.

It is worth remembering that deposits and sight accounts are the only products that guarantee a 100% recovery of the money invested, since, beyond the reimbursement agreement that has been reached with the entity, they are covered by the Deposit guarantee fund, which would respond to clients if the entity went bankrupt.

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