Investors are facing a new reality, in which lower rates and inflation control will predominate. This will affect, above all, those with a predilection for debt assets. Thus, products such as mutual funds or fixed-income index funds will be among the most benefited by these changes. As a result, more and more people are opting for them.
In addition, this type of product offers a series of advantages that are highly valued by investors. Especially in the case of fixed-income index funds, they stand out for their low costs. However, it is important to understand their virtues, as they also have their limitations.
What are fixed income index funds?
Fixed-income index funds are fixed-income collective investment products in which unit holders’ assets are invested in debt issues, such as bonds, debentures or treasury bills, issued by governments or companies. These funds do not seek to outperform the market, but simply to replicate a specific fixed income index. In this way, investors can access a diversified portfolio without the need to select each asset individually, which increases their attractiveness.
How do fixed-income index funds work?
The operation of fixed-income index funds is virtually identical to that of any other fund. A product is created, managed mainly through an algorithm, which buys and sells debt assets by tracking the movements of the benchmark index to replicate its performance. Unit holders, for their part, can subscribe units or redeem them at the net asset value in force on the day of the transaction, which is determined at the close of the markets.
The advantages of investing in fixed-income index funds
In general, investing in products such as fixed-income index funds has a number of important advantages, such as diversification or the generation of regular income, which are highly valued by investors. The current market situation enhances these virtues, making them even more attractive. Among the advantages they offer, the following stand out:
- Diversification: By investing in a fixed income index fund, investors gain exposure to a wide range of bonds issued by different entities (governments, corporations, etc.), with different maturities and risk levels. This helps reduce issuer- or sector-specific risk. In addition, fixed income acts as a counterbalance to equities, helping to balance and diversify portfolios with more aggressive investments.
- Reduced costs: Index funds have lower management fees than actively managed funds, as they do not require the constant intervention of a manager to select assets. This is reflected in a fund’s TER (Total Expense Ratio), which is the key indicator of all associated costs. By having lower costs, investors can obtain higher net returns over the long term.
- Transparency: Since these funds replicate an index, investors can know exactly what they are investing in, making it easier to understand and monitor their investment.
- Lower volatility: Fixed-income index funds tend to be less volatile than those that invest in equities, as government bonds tend to be more stable. This makes them a safer option for conservative investors or for those seeking to diversify a portfolio primarily composed of equities.
- Accessibility: Investing in fixed-income index funds is fairly straightforward, both in terms of the availability of the funds and in terms of their accessibility.
Disadvantages of investing in fixed-income index funds
Despite their many advantages, fixed-income index funds also have some disadvantages that should be taken into account:
- Limited return potential: Although they offer stability, fixed income funds generally provide lower returns than equity investments. In a low interest rate environment, returns may be particularly modest.
- Interest rate sensitivity: Bond prices often decline when interest rates rise, which can negatively impact the value of a fixed income index fund. This is especially relevant in periods of rate increases by central banks.
- Lack of flexibility: By tracking an index, these funds cannot adjust quickly to changes in the market or take advantage of investment opportunities that an active manager might identify. This can be a drawback in changing market environments.
- Credit risk: Although diversified, fixed-income index funds are still exposed to the risk of bond issuers defaulting on their payment obligations, especially if the fund includes bonds of lower credit quality.
Invest in fixed income index funds with inbestMe
If you are thinking of investing in fixed income index funds, a good option is to do it through inbestMe. This investment platform has a long history in Spain, helping all types of profiles to invest. In its portfolio, you can find different indexed bond portfolios, optimized to generate both high diversification and maximum yield. In addition, you can access them with a minimum investment of 1,000 euros. Do not hesitate and start investing with inbestMe.
