Can you lose money with a fixed income fund?

Fixed income funds are known for being one of the investment options considered relatively safer compared to, for example, equity funds. However, it's important to understand that, although the risk may be lower, they are not exempt from losses.

When investing in a fixed income fund, you should keep in mind that this also carries risks. Therefore, to help you make your investment with all the necessary information, we have prepared this comprehensive article. Here, we not only analyze the factors that can cause losses or when they are more likely to happen. We will also explain how to mitigate these risks to make informed decisions.

What is a fixed income fund?

A fixed income fund is an investment vehicle that pools money from multiple investors to buy bonds and other debt assets. Investors in these types of funds are not looking for high short-term gains, but rather to receive regular income through interest paid on the bonds.

Who are the issuers of these bonds? They can be both governments and companies, allowing risk diversification within the fund. At the end of the bond period, the investor receives the principal value, helping to preserve the initial capital.

These well-defined characteristics make this type of investment a suitable option for more conservative profiles, who prioritize stability over profitability.

What types of fixed income funds are there?

Fixed income funds can be classified into several categories, depending on the type of debt assets they invest in. Therefore, they are categorized as follows:

• Government bond funds - They tend to be the safest as they are backed by national governments, though they offer lower returns.
• Corporate bond funds - These invest in bonds issued by companies, with the advantage of potentially offering higher returns in exchange for taking on more risk.
• International bond funds - They invest in bonds issued by governments and companies outside the home country, offering more opportunities but also introducing additional risks related to exchange rates and political stability.

Factors that can lead to losses in a fixed income fund

While thinking about fixed income funds may give the impression that they are all advantages, the reality is quite different. Although the risk is lower than in other types of investments, this does not prevent losses, with the following being the main factors:

Rising interest rates

One of the main factors that can cause an investor to lose money in a fixed income fund is rising interest rates. Bonds issued in a low-interest-rate environment lose value when rates rise. Why does this happen? New bonds offer more attractive returns.

If an investor needs to sell their fund shares before the bonds mature, they are likely to do so at a lower price than the original one, which could result in losses. For example, if the fund bought bonds at an interest rate of 2%, but new issuances offer 4%, the original bonds lose value in the secondary market.

Credit or default risk

Although government and high-quality corporate bonds are assumed to have low risk, there is always the possibility of default. Credit risk is higher in corporate bonds from companies with low credit ratings or even in countries with fragile economic situations.

If an issuer cannot meet its payment obligations, the bond's value plummets, and as a result, the fund may suffer losses. This situation can occur if the issuing company faces financial difficulties. While the impact is smaller in more diversified funds, it remains an important factor.

Impact of inflation

Inflation is another critical factor for fixed income funds. If the bond's yield is lower than the inflation rate, the purchasing power of the interest received decreases. While the bond's nominal value remains the same, the real value in terms of what can be bought with that money will be lower.

In a high-inflation environment, the value of long-term investments can be eroded. It's important to note that there are inflation-linked bonds that adjust their value according to price increases, which can be a good option to mitigate this risk.

In what cases is it more likely to lose money with fixed income funds?

Losses in a fixed income fund are more likely in certain situations, such as when there is a sudden rise in interest rates, reducing the market value of the bonds in the fund. It is also possible that, in times of recession, when the risk of default increases, a significant loss occurs, especially in lower-quality corporate bonds.

If an investor decides to withdraw their money before the bonds in the fund mature, they may suffer a loss. In what situation? If bond values fall due to market conditions.

Strategies to minimize risk in fixed income funds

While it is not possible to completely eliminate risk, there are several strategies that investors can follow to minimize losses, with some of the most popular options being the following:

• Diversification - Investing in a mix of government and corporate bonds from different countries and sectors can help spread the risk. This way, losses in one part of the portfolio can be offset by gains in others.
• Hold bonds until maturity - One way to avoid losses is by holding bonds until they mature. With this move, the investor receives the full value of their initial investment, unaffected by market volatility in the meantime.
• Invest in high-quality bonds - Opting for investment in bonds from issuers with a high credit rating reduces the risk of default. In this case, the return is lower, but the stability of the issuers is much higher.
• Inflation protection - Inflation-linked or indexed bonds adjust their yield based on price changes, helping to maintain the purchasing power of interest income.

At Inversa, we offer alternatives such as crowdlending, where investors can diversify their fixed income portfolios while investing in projects with attractive and short-term returns. All this with the possibility of generating additional income in a controlled and lower-risk manner.

Is a fixed income fund a safe investment option?

We must bear in mind that, in general terms, fixed income funds are more stable than other investment vehicles, such as equities. However, we should not think they are exempt from losses. Fluctuations in interest rates, default risks, or even the impact of inflation can negatively affect the performance of these funds.

If you want to invest in these types of funds, it is crucial to understand their characteristics as well as the factors that can influence their results, and to apply strategies that help minimize risk.

Through platforms like Inversa, investors can complement their fixed income strategy with alternative investments that allow them to maintain a diversified portfolio. This way, they can protect their capital against market uncertainties.