Fixed interest is similar to cash in that it is seen by most people as a more secure and safe investment vehicle. Returns can be predicted prior to investment in many cases, whilst in other cases the returns are lower due to the area in which funds are invested.
The main types of fixed interest securities are:
- Government bonds – issued directly by a government and are explicitly guaranteed. For instance, in Australia the Federal Government issues commonwealth securities to help pay for major government projects;
- Semi-government bonds – not issued directly by a government but might have a direct or implied guarantee. For instance, state governments and other entities that have a government guarantee, issue bonds to support their financial needs or to finance public projects; and
- Corporate bonds – issued by large public companies to fund expansion and other major projects. Corporate bonds differ in two important ways to government bonds – yield and credit quality;
- Term deposits – are funds deposited into an account for a fixed term with the purpose of earning interest. The interest rate that a term deposit receives is dependent on the amount and the term. Term deposit providers will offer different interest rates based on these factors as well as others, so compare deals to find a rate you are happy with.
- Hybrids – have characteristics of both equity and fixed interest securities. Convertible bonds, for example, commence as bonds but can be converted into equity at a future date. These types of securities have higher risk than government or corporate bonds as they are less secured. This means they come further down the repayment line if the issuer defaults on the loan. Capital notes and convertible preference shares are very similar you should receive regular interest payments, sometimes called distributions or dividends and convert to ordinary shares or cash on a fixed date in the future, usually in around 8-10 years; however, the issuer can do this earlier than expected.
Managed Funds can offer flexibility and diversity without requiring a large initial investment. It is an investment vehicle, which groups of individuals invest money, towards the purchase of a pool of investments, where investors do not have day to day control over the investment. The beneficial interest in the assets is divided into units that are issued to each investor.
Cost to the investor comprises the Management Fee, the Trustee Fee, Expenses and the wholesale investment management cost of the underlying investment products selected by the investor.
The fees charged by a wholesale fund are usually lower than a retail fund, however the investment strategy applied by a manager to retail and wholesale funds may be the same.