When you are looking at the investment options for your 401(k), you might consider fixed-income funds. Though these funds are a somewhat niche option for 401(k) investing, they can be useful in specific circ*mstances, such as if you are close to retirement and need low-risk assets to preserve your capital.
In this article, we’ll explain what fixed-income funds are and how to use them toward your investing goals.
Key Takeaways
- Fixed-income funds are low-risk investments that investors can use for their 401(k).
- If you are focused on growing your portfolio, these funds may not ideal because other asset types have greater potential for higher returns.
- Fixed-income funds are designed to generate regular, reliable returns.
What Are Fixed-Income Funds?
Fixed-income funds hold a portfolio of assets like bonds or other debt securities and provide fixed income, or regular payments. They are offered by banks and insurance companies, and they have features in common with a certificate of deposit (CD), which is a savings account that provides fixed returns for a set period. These funds are designed to grow slowly with little risk and provide a predictable rate of return.
Fixed-income funds are much less volatile than stocks, but they also tend to provide a lower rate of return.
Fixed-income funds primarily hold government and corporate bonds with short- to medium-term maturities of about two to four years. These funds typically pay higher interest than a money market fund, which usually invests in fixed-income securities that are very liquid, such as cash or contracts with short maturities.
Other terms that may refer to a fixed-income fund or a type of fixed-income fund include: stable value funds, guaranteed investment contracts (GICs), capital preservation funds, principal protection funds, fixed interest funds, guaranteed funds, or stable interest funds.
Some types of these funds are also limited in their availability. For example, stable-value funds are generally only available via your 401(k), and even then, some employers do not offer them to their plan participants. This means that you may not be able to purchase all types of fixed-income funds in an individual retirement account (IRA) or your brokerage account.
Unlike with mutual funds, theshare price of some fixed-income funds, such as stable value funds, will not change over time.
How to Use Fixed-Income Funds in Your 401(k)
Though there is generally a fixed-income allocation in most target-date funds, for most people who are managing their own 401(k), fixed-income funds have only a limited utility. Perhaps the best way to look at these funds is as a happy medium between cash and money market funds, which have low yields, and bond funds, which have higher risk and volatility.
Stable value funds are primarily useful for conservative investors and those with relatively short time horizons. If you are nearing retirement, these funds will provide income with minimal risk. They can also help to stabilize the rest of your portfolio, acting as a hedge against stock market volatility.
On the other hand, if you can tolerate more risk and want to grow your portfolio aggressively, then these funds may not be suitable for you. Over the long term, they are unlikely to provide as high a return as stock funds. In general, most advisors recommend allocating no more than 6% to 15% of one’s assets into these funds, with the average allocation falling in the 13% range. How much you allocate will depend on your own investing goals and financial situation.
What are fixed-income 401(k) funds?
A fixed-income fund holds multiple fixed-income assets and pays a set rate of return over a certain period of time. These funds are composed of investment contracts issued by banks and insurance companies.
Why use fixed-income 401(k) funds?
Fixed-income funds can help investors preserve capital while earning a modest return, so they are often ideal for people near or in retirement. Stable value funds provide liquidity and offer returns that are comparable to short-term bonds.
How safe are fixed-income 401(k) funds?
Fixed-income 401(k) funds are considered a safe investment. The chance of losing money or not receiving your expected returns is small compared with other investment types like stocks.
The Bottom Line
Fixed-income funds are considered a low-risk investment for helping you diversify your 401(k) from stocks. If you have a high risk tolerance, such as if you are decades away from retirement, then these funds may not be ideal because they tend to provide lower returns. Your money has a greater potential for higher gains with other, higher-risk investment types like stocks or regular mutual funds.
However, for investors with a low risk tolerance, fixed-income 401(k) funds can be an ideal asset to preserve capital and provide predictable income.
FAQs
This depends on your risk tolerance, and how long you have until you retire. Stable value funds are ideal for investors nearing retirement. They are not designed for growth. Most advisors recommend allocating no more than 15% to 20% of one's assets into these funds.
Should I have fixed-income in my 401k? ›
Whether your goal is to diversify your investments, save for the future, receive dependable income, preserve principal, or help minimize taxes, fixed income investments could be a way to reach your goals.
Should you have fixed-income investments? ›
Fixed income as an asset class is generally less volatile than equities (stocks), and is considered to be more conservative. A well-diversified portfolio should have some allocation of fixed income. For some investors, this allocation increases as their investment time horizon shortens (e.g., as retirement approaches).
Should I put my 401k in a stable fund? ›
Mistake No.
Money market and stable value funds are fancy words for cash, a low risk, low return investment, and the return from cash usually lags behind inflation. This means that a 401(k) in these safe investments will probably decline in value over time.
How do I protect my 401k from a market crash? ›
5 steps to protect your 401(k) investments
- Continue contributing to your 401(k) plan. First and foremost, don't abandon your retirement planning during a recession. ...
- Maintain a well-diversified portfolio. ...
- Consider investing in defensive stocks. ...
- Opt for value over growth stocks. ...
- Make room for income-producing assets.
Fixed-income securities typically provide lower returns than stocks and other types of investments, making it difficult to grow wealth over time. Additionally, fixed-income investments are subject to interest rate risk.
What is the downside to fixed income annuities? ›
Because of surrender fees and other penalties, fixed annuities can be difficult to convert to cash. You're usually limited to an annual withdrawal of no more than 10% of your annuity's value. Given this limited liquidity, they will likely be inaccessible in the event of a financial emergency. High fees.
How risky is a fixed income fund? ›
Summary. Fixed income risks occur due to the unpredictability of the market. Risks can impact the market value and cash flows from the security. The major risks include interest rate, reinvestment, call/prepayment, credit, inflation, liquidity, exchange rate, volatility, political, event, and sector risks.
Does fixed income do well in recession? ›
This suggests that when paired with risk assets like equities, which tend to have less favorable performance during recessionary periods, fixed income can help manage downside risk during downturns.
How much of my portfolio should be in fixed income? ›
Many financial advisors recommend a 60/40 asset allocation between stocks and fixed income to take advantage of growth while keeping up your defenses.
Bond funds, money market funds, index funds, stable value funds, and target-date funds are lower-risk options for your 401(k).
Should I still be putting money in my 401k? ›
Experts say that if your company offers a matching contribution, you should make sure you contribute enough to get it all. Another rule of thumb is to save 10% to 15% of your gross salary. After that, shoot for saving up to 20% of your gross salary. Consider other retirement savings accounts, such as a Roth IRA.
Is a stable value fund safe if the market crashes? ›
A stable value fund is an insured bond portfolio, popular with investors that have low risk tolerances. The insurance piece of these funds makes them nearly as safe as money market funds.
What happens to 401k if economy collapses? ›
What Happens to My 401(k) If the Stock Market Crashes? If you are invested in stocks, those holdings will likely see their value fall. But if you have several years until you need your retirement account money, keep contributing, as you may be able to buy many stocks on sale.
Is the stock market going to crash in 2024? ›
While many experts are making predictions about whether the market will crash in 2024 or how severe the next downturn will be, it's impossible to say with certainty where stock prices will be in the short term. However, the market's long-term performance is all but guaranteed to be positive.
Will I lose my 401k in a recession? ›
The value of a 401(k) account, or any retirement account, always depends on how the account is invested. For many people who are still decades away from retirement, their portfolios will largely consist of stocks, which may suffer declines during a recession or economic slowdown.
How much should I have in bonds in my 401k? ›
Cash: 8% of assets are kept in cash for years 1 and 2 of retirement. Bonds: 32% of assets are kept in bonds for years 3-10 of retirement. Stocks: 60% of assets are kept in stocks for year 11 and beyond.
Should I still keep putting money in my 401k? ›
As your income grows, it is important to continue to save 15% to 20% of it so that you can invest the funds and grow your investments until you need to start taking distributions in retirement."
Should I put more in my 401k to avoid taxes? ›
Contribute as much as you can to your retirement plan
Contributions to these plans may be made pretax, which means they will reduce the amount of your income that is subject to tax for this year. Most employers will allow you to have the money automatically come out of your paycheck each month before you even see it.
Should I have bonds in my retirement portfolio? ›
The rule instructs that a worker approaching retirement, and anyone seeking investment stability, should aim to have 60% of their holdings in stocks and 40% in bonds. The stocks yield robust returns. The bonds provide modest but stable income and serve as a buffer when stocks go south.
