Fixed income is not fixed; it has fluctuations and depends a lot on market expectations and forces.
Investors entering fixed income investments are , for the most part, concerned about the security of their capital . Follow me in this article, where we will cover important points that you should consider before diving into Fixed Income Investments.
How Does Fixed Income Work?
In fixed income, the investor lends his money to an institution in exchange for a remuneration defined at the time of investment. For example, when purchasing a debenture, the investor lends money to a company, which uses it to generate its activities, buy its inputs, pay employees and make sales. As a result, it makes a profit and part of it is distributed to shareholders, another part is returned to society as taxes and another part is paid with interest to creditors, being returned to you, the investor, after this cycle is completed.
Types of fixed income and their characteristics
Fixed income offers a variety of options for investors with different profiles and objectives. Each type has specific characteristics, liquidity levels and uses.
1. Treasury Direct:
Types:
- Selic Treasury: post-fixed, linked to the Selic rate.
- Prefixed Treasury: pre-defined profitability at the time of purchase.
- IPCA+ Treasury: profitability linked to inflation (IPCA) + fixed rate.
Liquidity:
- High: bonds can be redeemed at any time.
Uses:
- Emergency reserve;
- Composition of the Guarantee Fund (FGTS);
- Portfolio diversification.
2. CDB (Bank Deposit Certificate):
Types:
- Prefixed CBD: pre-defined profitability.
- Post-fixed CBD: linked to the CDI rate (CDI + spread).
- CBD DI: linked to the DI rate (DI + spread).
Liquidity:
- Variable: depends on the title and financial institution .
Uses:
- Extra income;
- Savings for specific goals;
- Portfolio diversification.
3. LCI (Real Estate Credit Letter):
Types:
- Prefixed LCI: pre-defined profitability.
- Post-fixed LCI: linked to the DI rate (DI + spread).
Liquidity:
- Low: Generally, redeem only at maturity.
Uses:
- Real estate financing;
- Investment exempt from income tax.
4. LCA (Agribusiness Letter of Credit):
Types:
- Prefixed LCA: pre-defined profitability.
- Post-fixed LCA: linked to the DI rate (DI + spread).
Liquidity:
- Low: Generally, redeem only at maturity.
Uses:
- Agribusiness financing;
- Investment exempt from income tax.
5. Debentures:
Types:
- Incentivized debentures: offer income tax exemption.
- Non-incentivized debentures: taxed by income tax.
Liquidity:
- Variable: depends on the title and issuing company.
Uses:
- Business financing;
- Investment with potential for high profitability.
6. Fixed Income Funds:
Types:
- Prefixed fixed income funds: pre-defined profitability.
- Post-fixed fixed income funds: linked to the CDI or DI rate.
- Multimarket funds: invest in fixed income and other assets.
Liquidity:
- High: Generally, redeem at any time.
Uses:
- Portfolio diversification;
- Investment with professional management.
7. CRI (Real Estate Receivables Certificate):
Types:
- Prefixed CRI: pre-defined profitability.
- CRI Post-fixed: linked to the DI rate (DI + spread).
Liquidity:
- Variable: depends on the title and issuing institution.
Uses:
- Financing of real estate projects;
- Investment with potential for high profitability.
8. CRA (Agribusiness Receivables Certificate):
Types:
- Prefixed CRA: pre-defined profitability.
- CRA Post-fixed: linked to the DI rate (DI + spread).
Liquidity:
- Variable: depends on the title and issuing institution.
Uses:
- Financing of agribusiness projects;
- Investment with potential for high profitability.
Fixed Income Risks and the Importance of the FGC
Understanding Fixed Income Risks
Investing in fixed income may seem like a safe and stable choice for many, but it is important to recognize that this type of investment is not risk-free. Let's analyze the main risks associated with fixed income and strategies to minimize them:
1. Credit Risk:
This is the risk that the bond issuer will be unable to meet its financial obligations, leaving the investor in a loss situation. To reduce this risk, it is essential to invest in bonds issued by entities with a good credit rating, such as solid governments or well-established companies. A recent example is the case of Americanas debenture holders who stopped receiving remuneration for their investments.
2. Market Risk:
The value of fixed income securities is subject to fluctuations due to changes in interest rates. When interest rates increase, the value of existing bonds decreases, and vice versa. Diversifying your portfolio with bonds of different maturities and rates can help mitigate this risk, as bonds can react differently to changes in interest rates. An example is the price of pre-fixed bonds, which may suffer a discount in a scenario of rising interest rates.
3. Liquidity Risk:
This risk arises when there is difficulty in selling a security before maturity, either due to lack of demand or market restrictions. An example would be the Americanas debentures in 2023, which had their sale suspended.
4. Inflation Risk:
Inflation can erode the purchasing power of the return generated by fixed income investments. To combat this risk, investors can opt for inflation-linked bonds, such as National Treasury bonds indexed to the IPCA (Broad National Consumer Price Index), which offer inflation-adjusted returns.
5. Regulatory Risk:
Changes in legislation can impact the fixed income market, affecting investment returns. To deal with this risk, it is essential to closely monitor changes in legislation and understand how they can affect investments. Staying up to date with regulations and adapting your investment strategy as needed can help mitigate this type of risk.
The Credit Guarantee Fund (FGC)
The FGC is a private, non-profit institution that guarantees deposits and investments in participating financial institutions.
How it works:
In the event of bankruptcy or extrajudicial liquidation of a financial institution associated with the FGC, investors can receive up to R$250,000 per CPF or CNPJ, per financial conglomerate, for the sum of the following products:
- Demand deposits: Current account, savings account and other types of demand deposits.
- CBDs: Bank Deposit Certificates, including pre-fixed and post-fixed CDBs linked to the DI.
- LCIs: Real Estate Credit Letters.
- LCAs: Agribusiness Letters of Credit.
- RDBs: Bank Deposit Receipts.
- Bills of Exchange (LCs): Credit securities that represent rights to receive a sum of money.
- Mortgage Letters (LHs): Credit securities backed by real estate mortgages.
Coverage limit:
- R$ 250 thousand by CPF or CNPJ: This limit applies to the sum of all products covered by the FGC in each financial conglomerate.
Important:
- The FGC does not cover all types of investments, such as:
- Investment funds:
- Debentures:
- Direct Treasury Bonds:
- CRI:
- CRA:
- The FGC does not guarantee investments in financial institutions that are not participants.
- To find out if a financial institution is a participant in the FGC, consult the FGC website:
Influence of the SELIC Rate on Income
The SELIC rate plays a fundamental role in the performance of fixed income investments, as every 45 days the COPOM meets to determine its level. My forecast for this year is a drop from 10.75% to 9.5% by the end of the year. Therefore, yields are expected to gradually decline over this period. Therefore, it is essential to be aware of market fluctuations and adjust the investment strategy as the economic scenario evolves.
Investments in Fixed Income are recommended but with caution.
In short, fixed income can also arouse strong emotions with its variations. It is necessary to understand its mechanisms and risks. Knowing the different types of investments and closely monitoring interest rates are essential steps to ensure success in this market . Despite the challenges, fixed income continues to be one of the main attractions for investors in Brazil.
