Introduction to Fixed Income Investing for Kids and Teens
This video explains the concept of fixed income in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about fixed income investing, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Elementary School
- Middle School
- High School
The topics covered are:
- What is fixed income
- What are the advantages of fixed income investing
- Are there any disadvantages of fixed income investing
- Should you invest in fixed income
What is fixed income?
Fixed income is an asset class that includes debt securities, which give investors fixed payments in the form of interest or dividend until their maturity date.
At maturity, the investor holding the security is given back the principal, which is the amount it was issued for.
Corporate and government bonds are the most common type of fixed income securities. Others include munis or municipal bonds, treasury bonds, treasury bills, and CDs or certificates of deposit.
Just like equities, you can invest in fixed income securities directly, or through fixed income ETFs and mutual funds.
What are the advantages of fixed income investing?
As the name suggests, fixed income securities give their holders fixed and predictable income, which is less prone to market volatility. Because of this, they can be a good choice if you are investing for consistent income or are nearing retirement.
Also, many fixed income investments are low risk: treasury instruments are backed by the US government, CDs are usually backed by FDIC insurance, and corporate bondholders get paid before stockholders in case of bankruptcy.
So fixed income could be a good option if you are looking for safer investment avenues or to offset risky investments in your portfolio.
Some fixed income securities, like municipal bonds, also offer tax benefits – their coupon payments are exempt from federal and state income taxes.
Are there any disadvantages of fixed income investing?
Fixed income securities give investors predictable income, but they do not have a high potential for capital growth. As with all investments, their low risk leads to low returns.
Also, even if the market interest rate goes up, their interest rate doesn’t change.
In addition, although most fixed income securities are low risk, many aren’t completely risk-free and selling them or getting your investment back may not be that easy. For instance, there could be a penalty if you want to withdraw from your CD before maturity.
Also, while bondholders are paid before shareholders in the event of bankruptcy, there is a good chance that they may not get their entire investment back.
Should I invest in fixed income?
Yes, everyone needs to invest in fixed income securities to achieve diversification. Their exact proportion in your portfolio depends on many factors like your age, risk tolerance, etc.
Watch our video on asset allocation to learn more.