Fixed-income investments in Australia
Compare managed funds, term deposits and trading platforms to invest in fixed income.
Fixed income or fixed interest as it is sometimes called is a type of investment that offers regular set returns over a specific time.
The idea of fixed interest is that your rate of return is known, so unlike when you invest in stocks or most other kinds of investments, your wealth doesn’t fluctuate or fall. However, in return for this, it is unlikely that you will see as strong growth over a long time.
For this reason, fixed-income assets are often seen as one of the safest forms of investing. Common fixed-income assets include term deposits, government bonds and gold.
How to invest in fixed income
First, it’s important to understand that fixed income encompasses many different kinds of products. Even if a fund has labelled itself as being “fixed income” or “fixed interest”, it does not mean that your returns are guaranteed or that your money is safe from market volatility.
Fixed-income products also differ broadly in terms of risk and performance. While fixed-income products offered by the banks, such as term deposits, have a safety guarantee of up to $250,000 (a by-product of the GFC), non-bank products broadly categorised as “investment funds” have no such guarantee and are regulated entirely differently.
Examples of products that are commonly classified as fixed-income investments are outlined in this guide below:
See below to read more about the different benefits and risks of fixed-income investing.
Peer-to-peer lending for investors
Peer-to-peer (P2P) lending platforms connect everyday borrowers with investors. Investors replace the banks to become lenders while borrowers sign up to the same platform to receive loans.
Investors benefit from loaning their funds through a P2P because they can get a higher return than they normally would by investing in a banking product. Plus, most P2P funds offer fixed returns over several months or years, making these a potentially less volatile option than share-market investing or investing in other kinds of managed funds.
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Disclaimer: Investments made through a P2P lending platform are not protected and are subject to risks including credit risk (defaults) and liquidity risk. These investments are not subject to review by the Australian Financial Complaints Authority. Actual returns may vary from the Expected Returns declared by the Providers. Read the PDS for details before investing and consider your own circumstances, or get advice, before investing.
What are the pros?
- Fixed rate. When you invest in a P2P fund, you’re agreeing to a fixed rate of return. So long as the fund delivers on its promise, you’ll know what to expect at the end of the term.
- Higher returns. Most P2P funds offer higher interest-rate returns than bank products like term deposits or savings accounts.
- Potentially less risky. Although risk level varies enormously across P2P products, they tend to be less volatile than stocks and many are considered far safer.
What are the cons?
- No guaranteed return. Although you have the potential to get a higher return than you normally would with a term deposit or savings account, there's the possibility of losing your money if a borrower defaults.
- Credit ratings. P2Ps sometimes categorise funds as low risk or high risk, but to date, there is no regulated standard across operators, which makes it difficult to compare funds.
- Exiting the fund. Like a term deposit, you’re locked into the fund for a set duration and you can expect penalties should you choose to exit before the term ends.
For more about the pros and cons of this type of product, you can read our comprehensive guide to peer-to-peer investing.
Finder survey: What features are most important to people in a forex trading platform?
| Response | Male | Female |
|---|---|---|
| Low commissions | 5.75% | 2.16% |
| Tight spreads | 2.6% | 1% |
| Good range of forex pairs | 1.86% | 1.33% |
| Easy to use platform | 1.67% | 1.49% |
| Quality trading tools | 1.67% | 1% |
| Security and regulation | 1.3% | 1.33% |
| High liquidity | 1.11% | 0.5% |
| Speed of execution | 1.11% | 1% |
| Available platform (e.g. MT4) | 0.74% | 0.33% |
| Technical analysis tools | 0.19% | 0.66% |
| Availability of less common pairs (e.g. exotics) | 0.5% | |
| Personal advice services | 0.37% | 0.17% |
| None of the above | 0.19% | 0.17% |
Source: Finder survey by Pure Profile of 1145 Australians, December 2023
Invest in term deposits
This is perhaps the most common way to invest is term deposits.
These are when banks offer you a fixed rate of return on the premise that you will lock down the funds for a specified time. In return, the issuing financial institution rewards you with interest on your money at an agreed-upon rate. It's considered one of the safest options available to investors.
Because the interest rate is fixed, you know exactly how much your pool of money will have grown at the end of the term. Once the term ends, you can withdraw the money or reinvest it. The downside is that if you choose to withdraw your funds early, there’s usually a cash penalty applied.
For more information on bank products, you can read our comprehensive guide to term deposits and high interest savings accounts.
What are the pros?
- Fixed rate. You’re agreeing to a fixed rate of return, so you know exactly what you’ll get at the end of the term.
- Very low risk. There are few options safer for your money than a term deposit. There is no market volatility and little or no risk of losing your investment.
- Guaranteed protection. Term deposits through a bank are guaranteed by the government to the amount of $250,000.
What are the cons?
- Lower returns. The fixed-rate returns are typically lower than with other investment products.
- Less liquidity. You’re locked into the fund for a set duration, and you can expect penalties if you choose to exit before the term ends.
Invest in bonds
When most people think of fixed interest, they think of the bond market. A bond is a contract where you lend money to a business or government. In return, the organisation promises to pay you back at a fixed rate of interest.
Bonds are considered to be one of the safest assets you can invest in, depending on the class of bond. These range from AAA, which is the highest quality, down to D grade. The lower the quality, the higher the risk but also the higher the return.
When it comes to getting your money back, as long as the organisation issuing the bond doesn’t collapse, there’s little chance that you’ll lose your money. For this reason, government and blue chip company bonds tend to be a safe bet, but there are exceptions.
Investing directly in the bond market typically requires a high minimum investment of around $500,000. Those looking to invest less can buy units in bond-managed funds, ETFs or exchange traded bonds.
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What are the pros?
- Fixed rate. When you invest directly in bonds, you know exactly what return you’ll get at the bond’s maturity rate.
- Low risk. Investment-grade bonds are considered one of the safest investment options available.
- Returns. The investment returns that you get from some bonds are higher than what you can expect from some term deposits or savings accounts.
- Regular income. When you invest in bonds, you receive income in the form of coupon payments on a regular basis.
What are the cons?
- Lower returns. Bonds typically offer lower returns than what you can potentially get from share trading and some investment funds.
- Exiting the investment. In most cases, you’ll be penalised for exiting before the maturity date.
- High investment. Bonds typically require a minimum investment of around $500,000.
Watch: How to invest in bonds in Australia
Fixed-income funds and ETFs
Today, there are many managed investment funds, listed investment trusts (LITs), listed investment companies (LICs) and ETFs that offer access to fixed-interest assets.
Investment funds are a portfolio of assets that can include shares, bonds, cash and derivative products. These funds are managed by a group of investment professionals who decide which assets the fund will hold or which index it’s tracking.
Some of these funds offer fixed income in the form of dividends, and others benefit from the rising demand for bonds or cash as an asset class. It’s important to understand that although they may hold fixed-income assets, they might not offer fixed-interest payments or maturity dates.
Investment funds come with different rules, requirements and risks that are at the discretion of the issuer.
Many of these products are complex and require expert advice. For more information on these, you can follow the links to our guides:
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Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
*Brokerage fees shown are for standard share trading, see below for a list of mFund fees.
What are the pros?
- Higher returns. There’s the potential to get a higher capital return than traditional bond investing.
- Liquidity. Funds listed on a stock exchange can offer high liquidity.
- Flexibility. Fixed-interest funds have options to suit a broader range of investors than direct bond investing as they can hold any number of securities.
- Cost. It’s possible to invest in bond funds for as little as a few hundred or thousand dollars, rather than $500,000 for direct bond investing.
What are the cons?
- May not have a set return. Investment funds have their own rules around interest payments, and this may not be fixed as with other income products.
- Transparency. Investment funds, LICs and LITS may hold any number of assets, including risky derivative products, and these do not always need to be reported immediately. This means investors may not know exactly what they’re investing in.
- Uncertain return. There’s no guarantee that you’ll receive the return that you hope for as the fund’s value may fluctuate depending on market demand.
Invest in hybrid securities
Hybrid securities are contracts issued by companies, banks or insurers that have both debt and equity features. They may also be referred to as convertible bonds, capital notes, subordinated notes and convertible preference shares, depending on the contract and issuer.
Although these securities behave similarly to bonds, they can be far riskier and are sometimes classified as “growth products” rather than “fixed-income products”.
They typically work by paying interest to investors for a specified time, and they’re oftentimes listed on a stock exchange and traded like shares. This means the market price may be volatile and an investor risks losing money if it falls below the buying price.
Unlike bonds, there’s enormous flexibility on the issuer’s part, which can make the products riskier or more complex for investors. For example, some hybrids allow the issuer to cancel the deal, suspend payments or convert the securities into shares as they choose.
What are the pros?
- High returns. As with other kinds of risky investments, there’s the potential to earn a higher return on investment than with bonds.
- Volatility. Their price is typically less volatile than shares.
- Income. Hybrids typically offer regular income payments that may include franking credits.
What are the cons?
- They may be unsecured. This means you risk losing your investment entirely should the company become insolvent.
- Market and interest rate volatility. If the fund falls below the price you paid for it, you risk losing money while interest rate changes can also impact the hybrid's value.
- Liquidity. The market for hybrids is smaller than shares, which means it may be harder to sell for a competitive price if demand falls.
- Income not guaranteed. Investors may not be paid an income or have their payments deferred for months or years, depending on the contract. This may be due to legal changes, corporate losses or other reasons.
Frequently Asked Questions
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.
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