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Fixed-Income Investments – Make Money in Your Sleep

Having a fixed income that keeps you afloat without any extra effort required on your part, that's the dream of many private investors and working citizens. And with the right investment decisions, this dream can become a reality. In fact, having a stable fixed income can make you financially secure enough to coast comfortably into retirement – or it may give you the financial freedom to also invest in CARL's quantitative hedge funds to further build your wealth.

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The Fixed Income Dream

In financial terms, "fixed income" is an investment strategy that aims to create a steady stream of income at a low level of risk. Notably, the goal of this strategy isn't to produce massive returns, as these usually come with a significant amount of risk – and that's precisely not what you want if you're going for a fixed income.

Fixed income portfolios usually consist of investments that offer a fixed amount of money paid to you at regular intervals and with minimal fluctuation. Usually, the returns come in the form of interest payments. Fixed income securities also typically aim to pay back the principal, which means they are set up to return the money you invested in full.

This goes contrary to many other standard investment models. For example, if you're investing in high-yield financial derivatives, it is generally understood that your investment comes with the risk of falling through entirely. In the worst-case scenario, this may lose you all the money you invested. If you're investing in the stock market, the risk of losing everything is somewhat smaller. Still, your dividend payouts may also change over time, as the company's stock changes in value or the company issues new shares, leading to you having a smaller overall share in the company.

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Ask Yourself: What’s Your Investment Goal?

While fixed-income investments rarely offer the same level of potential gains which other investment strategies can provide, they are a dependable source of income. This makes fixed-income securities ideal as a way for you to gain a "base income" – either to give you the financial freedom to also invest in more risky products or to supplement your regular salary or pension.

So if you're looking for a reliable stream of income that allows you to invest in CARL's hedge funds with minimal risk to your overall financial wellbeing or if you're simply aiming to increase your regular income, fixed-income securities may be the perfect choice for you. 

How Safe Are Fixed-Income Funds?

Whether you're investing in mutual funds, ETFs, or individual financial products such as bonds aimed to provide a steady stream of income – if you choose the right investment vehicles, you can effectively minimize most of the risk typically associated with investments in general. While you can never completely eliminate the risk inherent in any investment, fixed income funds tend to be some of the safest investment vehicles around.

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How Does Fixed-Income Investing Work?

The key to this strategy is to find investment opportunities that offer reliable payouts at a minimal level of risk. This is why fixed-income funds or individual investors will typically put their money into the following vehicles:

  • Bonds: This means that you're lending money to the US government (government bonds), a state/municipality/county (municipal bonds), or a company (corporate bonds). The bond's issuer then provides you with regular interest payments ("coupon payments") and pays back the principal once the bond matures.
  • Certificates of deposit: Effectively a way to loan money to financial institutions, which also provide you with regular interest payments and principal payback. CDs are usually protected by the FDIC or the NCUA, which drastically limits the risk of losing your money if the issuer gets into financial trouble.
  • Money market funds: A type of mutual fund which specializes in short-term debt securities. Since they aim to have a stable asset value level, these funds are considered to carry little risk while providing regular dividends.

As you can see, fixed-income securities are usually assets that are considered to carry little risk due to a powerful and reliable organization backing them. US government and municipal bonds (t-bonds, t-bills, or t-notes) are an excellent example of this since the United States Government and the governments of individual states are stable and backed by an overall strong economy. Hence, the likelihood of losing a large part of your investment is very low. Note that this may not be true for other governments around the world, which is why it would be incorrect to state that government bonds are always reliable. This is dependent on the government in question.

The risk associated with fixed-income investing

As stated above, fixed-income securities are not entirely risk-free. However, the exact nature of the risks involved is slightly different compared to other investment vehicles:

  • Inflation risk: The fixed income from your investment is not inflation-protected, which means it can effectively lose some of its value due to the effects of inflation.
  • Interest rate risk: Bonds, in particular, are tied to the interest rate. As interest rates rise, your bonds lose value, and your interest payments from this source are diminished.
  • Credit risk: This is the risk of losing money invested in corporate bonds if the company defaults on its payments. In this case, you might miss out on coupon payments and not get your principal back.
  • Liquidity risk: This is the risk associated with long-term illiquid investments. For example, if you've bought bonds and you suddenly need liquid capital, there's a risk that you may not find a buyer for your bonds on short notice.

What Are the Barriers for Fixed-Income Investments?

One of the main reasons some private investors don't invest in assets providing a fixed income is that they don't have the means to do so. Bonds, in particular, often come with high initial investment requirements and transaction fees. Add to that the fact that they're often highly illiquid and you'll find many ordinary US citizens simply can't afford it, even though bonds may otherwise be an ideal investment vehicle for small-scale investors, as the actual risk of investment is exceptionally low.

Note: While many securities use the term "face value" to refer to their nominal value, bonds often use the term "par value" instead.

This is why bond funds have become very popular. These are usually exchange-traded funds (ETFs) or mutual funds which specialize in buying bonds. As a fund, they can pool the money of all of their investors, which allows even ordinary citizens access – if the fund offers a low initial investment barrier in the first place.

Using Fixed Income as a Diversification Tool

With all of that in mind, it should also be pointed out that fixed-income investments aren't just ideal for risk-averse investors looking to improve their retirement fund – high-stakes investors can also use them to diversify their portfolio. Let's look at an example:

Imagine your investment goals are to get as much out of your money as possible – in other words, you want to make as much money as possible, regardless of the risks. You may opt to invest everything you have in high-yield quantitative hedge funds from CARL's portfolio. Our hedge funds offer 15%+ targeted returns, after all. However, even with the power of quants, there is always a risk associated with hedge fund investing. Depending on which investment decisions you've made and how macro-scale economic events have impacted the global economy, you may end up with income that's prone to fluctuate. Imagine you received a specific amount of capital from your hedge funds investments every year, so you planned your finances with that amount in mind – and then the Covid-19 pandemic hits unexpectedly. Suddenly, the economy is weakened, and your otherwise strong quants provide significantly lower returns than the previous years. This might be a problem, depending on your remaining financial commitments.

This is why many investors opt to instead invest a certain amount of money into fixed-income securities to provide them with a reliable financial basis, minimizing the impact of fluctuating returns from other forms of investment. Another particularly popular strategy for making the most out of fixed-income products while reducing their downsides is "laddering", which means you invest in bonds with different time horizons. For example, you may put your capital into four different types of bonds, which mature after one, two, three, and four years, respectively. This means you get coupon payments on a regular basis (the "coupon rate") over four years, but you also get your principal back every year. This means the money is more liquid than had you invested all of it in one four-year bond (since you get the principal back only after the bond has matured), and you can still re-invest it every time one of your bonds reaches its maturity date. You can simplify this process by investing in a bond fund that already uses the laddering technique, so you don't need to re-invest every time.

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3 Easy Steps to Start Investing With CARL

Investing in quants is as easy as pie if you've got CARL on your side. Investors can set up an CARL account quickly and easily.

Set Up Your Account

Quickly and securely create your account, verify your investor status and become a member of our community.

Analyze Investments

Using the tools within the CARL app, determine which strategies at what allocations are right for your investment goals.

Fund Your Investment

Simply save your portfolio settings and on the next strategy funding cycle your investment will be live!

Once You’ve Got Your Income in Place, Invest With CARL for Additional Returns

While CARL's quantitative hedge funds are not ideal as fixed-income investments, they complement such investment strategies perfectly. With only a $20,000 initial investment and 15%+ targeted returns, CARL's quants can help provide you with significant returns, while your fixed-income assets provide diversification for your overall portfolio. And since there are no lock-up periods with CARL, your investments stay highly liquid, too. Set up an account with the CARL app today and feel the power of quants at your fingertips!

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