Fixed Income or Variable Income Investments: Which to Choose?

Do you know that there are two main types of investments—fixed income and variable income? Depending on your stage of life, both forms of investments have their merits and drawbacks.  

Knowing the differences between the two may help you make better financial decisions. You can decide how you should structure and balance your portfolio so that you have the right mix of risk, stability and reward for both short-term and long-term plans. 

In this article, we will explain the characteristics of both investment types, how they differ, as well as which you should consider. At the end of the article, you will learn how BigFundr’s own fixed income platform works, and decide for yourself if it complements your investment strategy.

Understanding Fixed Income Investments 

Fixed income investments provide a steady and predictable return over time. When you invest in these products, you essentially lend money to an entity—such as a company or a government—in exchange for regular interest payments. 

These payments are made over a fixed period. When the investment matures, you will get your principal back. Examples here include bonds. 

Fixed income investments are often seen as lower-risk because they offer consistent returns, making them ideal for investors who prefer stability over unpredictability. However, the trade-off is that their returns may be lower than those of higher-risk investments.

Platforms like BigFundr offer fixed returns on real estate-backed debt investments. Investors receive regular, predictable payouts, making this a reliable option for those seeking stable, short-term income.

Understanding Variable Income Investments 

Unlike fixed income investments, variable income products offer returns that fluctuate over time. These investments don’t guarantee a steady payout. However, they may have the potential for higher returns depending on how their underlying asset performs. Common examples include stocks, mutual funds, forex trading, options, and real estate investment trusts (REITs).

Variable income investments tend to carry more risk as their returns are tied to financial market conditions. Stock prices may rise and fall depending on factors like the company performance, economic conditions, or even global events. This makes them more suitable for investors who can handle some level of uncertainty and risk in exchange for possibly higher returns.

While they offer more growth potential, variable income investments also expose you to market volatility. This means that while you could see significant gains, there’s also the possibility of seeing a drop in value.

Differences Between Fixed and Variable Income Investments

Now, let us look at the differences between the two types of investments.

#1 Risk and Return

Fixed income investments come with lower risk because they offer predictable returns, making them suitable for conservative investors who want to preserve their capital. 

On the other hand, variable income investments carry higher risk but offer the potential for greater returns. The performance of variable income investments, like stocks, depends on market conditions, so returns can fluctuate.

#2 Income Stability

When it comes to stability, fixed income investments offer a steady and regular income. This makes them more reliable as a consistent source of cash flow—a key point for those who value stability.

In contrast, variable income investments provide fluctuating returns, which may be higher but less predictable. These depend on the performance of the asset vis-a-vis financial market conditions.

#3 Liquidity

Another key difference is liquidity. Variable income investments, such as stocks and mutual funds, generally offer better liquidity. You can sell these assets relatively quickly and convert them into cash. However, these may come with significant losses in a bear market. 

Fixed income investments, on the other hand, are less liquid. Selling these before they mature could lead to losses or a reduced payout. However, this depends on the tenure of the investment—short-term investments are generally more accessible than longer-term instruments.

#4 Inflation Protection 

In an inflationary environment, fixed income instruments may offer more predictable returns. However, to preserve your purchasing power, you need to choose options that can outpace inflation—this is predicted by MAS to range from 2.5% to 3.5%. 

On the other hand, variable income instruments, like stocks, have the potential to outpace inflation as businesses adjust their prices. However, they can also suffer during sudden market downturns or economic slowdowns, as seen in bear markets.

Which Investment is Suited for You?

When it comes to choosing between fixed income and variable income investments, the right answer depends on your risk tolerance, financial goals, and time horizon.

#1 Risk Tolerance

The level of risk you're willing to take is key to determining your investment approach.

If market swings keep you up at night, fixed income investments may offer peace of mind. These instruments—like bonds—offer predictable returns, preserving your capital and providing a steady stream of income.

But if you're comfortable with the ups and downs of the market, variable income options, like stocks and mutual funds, might be for you. The potential for higher returns comes with more volatility. For those with a stronger stomach for risk, these options can yield significant gains—but losses are part of the deal.

#2 Market Conditions

How the markets perform also matters. Low-interest environments have historically made traditional fixed income investments less attractive. Bonds and other fixed income instruments yield smaller returns in such climates, nudging investors to explore more innovative options.

In times of economic uncertainty, however, fixed income investments tend to shine. While stocks might fluctuate wildly during downturns, such investments offer stability, providing a cushion when market volatility is high.

#3 Financial Goals

Next, you need to think about your financial objectives.

If steady income is your goal, fixed income investments are a clear choice. Their regular payouts are dependable, which makes them ideal for investors looking to maintain cash flow.

For those seeking long-term growth, variable income investments like stocks may have more upside. With time, their value can rise, offering the potential for substantial returns—however, patience and resilience are essential.

#4 Investment Horizon

Finally, consider how much time you have prior to drawing down your funds.

Near-term needs call for safer bets. If you expect to tap into your funds in the short term, fixed income is the way to go. The predictable returns and lower risk are better suited to shorter investment horizons. Thus, these are usually favoured by older investors like retirees and pre-retirees.

But if you're playing the long game, variable income investments, despite their short-term volatility, have historically outperformed fixed income in the long run. Over time, markets tend to rebound, and the potential for growth is greater.

Diversify Your Portfolio

Diversifying your portfolio helps balance your risk and returns. While a 50/50 mix of variable income (stocks) and fixed income (bonds) is a common choice, there are other breakdowns to consider:

• 60/40 (Variable Income/Fixed Income): A balanced option for those with moderate risk tolerance. This mix offers more growth potential from variable income, while still providing stability from fixed income.
• 70/30 (Variable Income/Fixed Income): For investors comfortable with higher risk and aiming for long-term growth. This mix leans more towards variable income, while maintaining some stability with fixed income.
• 80/20 (Variable Income/Fixed Income): Suited for aggressive (and often young) investors. The focus is on growth, but it comes with increased risk, given the smaller allocation to fixed income.

For those who prioritise stability:

• 60/40 (Fixed Income/Variable Income): A conservative approach that focuses more on preserving capital, while still offering some growth potential from variable income.
• 80/20 (Fixed Income/Variable Income): Ideal for retirees or risk-averse investors. This mix prioritises fixed income for steady, predictable returns, with minimal exposure to the volatility of variable income.

Each allocation has different implications depending on your stage in life and risk tolerance.

Disclaimer: This is for informational purposes only and not financial advice. Always consult a licensed financial advisor before making investment decisions.

BigFundr: An Ideal Fixed Income Investment Option

If you're looking for a fixed income investment that offers both stability and competitive returns, BigFundr is a standout option. Here’s why:

• Attractive Returns: With returns of up to 6.38%, BigFundr outperforms many traditional fixed income investments. These returns make it an appealing choice for investors seeking higher yields without sacrificing stability.
• Short Tenure: BigFundr offers flexible investment periods, ranging from 6 to 18 months, providing both solid returns and liquidity. This flexibility is ideal for those who want consistent payouts while maintaining access to their funds in the short term.
• Regular Income: Investors benefit from monthly payouts, ensuring a steady stream of income and cash flow throughout the investment period. This makes it a reliable choice for those looking to generate predictable, regular income.
• Enhanced Security: BigFundr prioritises capital preservation, with robust measures in place to ensure that investors’ principal are returned in full together with their interest payments. This addresses key investor concerns and enhances confidence in the safety of the investment.

Conclusion

When choosing between fixed and variable income investments, it's important to carefully consider your financial situation, goals, and risk tolerance. If you're seeking stability with competitive returns, BigFundr provides an excellent fixed income option. It combines the predictable nature of fixed income with the flexibility and higher returns that modern investors are looking for.

Ready to diversify your portfolio? Sign up with BigFundr today.