Opinion – Grain in Grain: Understand the three decisions that influence the yield of your fixed income

For the vast majority of investors, the term fixed income is associated with two forms of profitability: savings accounts and the CDI or Selic rate. The Selic rate is known as the basic rate of the economy, as it helps to shape or direct the others. Thus, to increase the profitability of your fixed-income investment, you need to make decisions regarding the characteristics of this rate.

The investment that yields the Selic rate is a federal public security, with daily liquidity and called Treasury Financial Bill (LFT). On the Tesouro Direto platform, it is sold under the fancy name of Tesouro Selic so that investors can better understand what they are investing in.

So, to choose where to invest in fixed income in order to increase your profitability, you need to make three basic decisions regarding the characteristics of this security. Are they:

1) what is the deadline?
2) which indexer?
3) which issuer?

These three decisions influence the profitability you will obtain, in the future, in relation to the basic profitability of the Selic.

If well selected, they have the potential to increase returns, but this advantage always comes with a cost. You must weigh this cost against the additional return to decide whether it is worth it.

The costs are: liquidity, volatility of returns and credit risk.

Usually, the longer the term, the higher the expected return, but you may experience greater volatility and eventually lose liquidity.

Private issues carry credit risk. Therefore, they have a greater prospect of return.

Profitability indices other than the Selic rate, for example, prefixed or referenced to the IPCA, can bring volatility to the portfolio, if the security is marked to market.

The choice of these is related to your investment horizon and risk appetite or investor profile.

With the current higher CDI, taking advantage of these characteristics becomes even more advantageous.

Liquidity investments referenced to CDI should yield close to 13% per year over the next twelve months.

However, investments in private securities such as CDBs, debentures and private credit fixed income funds, with longer redemption periods, can provide returns of 110%, 120% or even more than 130% of the CDI. These returns are equivalent to 14.3%, 15.6% and 16.9% per year, respectively.

Savings can also be placed in this cost balance and even lose out on Selic.

Savings are issued by a private institution and have a term. Therefore, she should yield more. However, it yields less than 80% of Selic’s net income tax.

This inconsistency in the decision of investors, who invest R$ 1 trillion in savings, is an enigma for the financial market and an advantage that banks take advantage of.

So plan your budget to understand which investment horizon you can take advantage of. Also, reflect on your investor profile to weigh the risks you accept. In this way, you can increase the returns on your fixed income portfolio.

Michael Viriato is an investment advisor and founding partner of Investor’s House

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