I recently wrote that at current interest rates, fixed income is the investment class with the best balance between return and risk to live on passive income. However, would it be possible to extract even more from this fixed income? I explain one form below.
When it comes to fixed income, one of the existing classifications is in relation to the issuer. According to the issuer, fixed income securities can be separated into public or private.
If the bond was issued by the federal government, for example, it is a public bond. If it is issued by a company, it is a private security.
Every fixed income security is nothing more than a debt contract between the issuer and the investor.
The issuer agrees to pay an amount divided between principal and interest under certain conditions. That is, a fixed income security is a debt.
So, like any debt, the biggest risk is the issuer not paying what was promised.
As the federal government is the entity with the highest credit quality in debt in the national currency, its bonds are naturally the ones with the lowest risk. But, this advantage does not come for free. The cost of it is a lower return among fixed income alternatives.
Private bonds are relatively risky. Consequently, the investor is rewarded with a higher expected return.
There is a great deal of debate as to whether this award pays off. I won’t get into that discussion in this article. But, I invite you to leave your opinion in the comments.
Of course, if no credit event occurs, that is, if the bond pays off as promised, the risk premium pays off.
For a given title and condition, the choice of private title seems to me almost obvious. Just don’t opt ​​for them, those who are unaware of the advantage.
There are bank securities, such as CDBs, within the coverage of the Credit Guarantee Fund (FGC) that yield between 110% and 120% of the public equivalent.
As they are guaranteed by the FGC, they are “almost like government bonds” with the advantage of presenting higher returns.
If you are afraid of investing in bank securities within the FGC limit, understand that your fear has only one reason, the lack of knowledge. So, after reading this article, go back to understand more. For example, read the interview I did with Daniel Lima, the CEO of FGC.
Private bonds without FGC are more risky. Their guarantee can be obtained through real estate, financial guarantees, receivables and others.
Investment in them requires further study and monitoring. The best tip in this case is to spray the application on several emitters.
If you are an initial investor, private credit investment funds are a better alternative to the direct purchase of debentures, CRIs and others. They add spraying and a team to analyze and monitor investments.
Despite the risks, there are alternatives with high potential for returns.
For example, according to Gabriel Nascimento, co-founder of Ulend, a Fintech specialized in investments in private credit: “The IRR of Ulend’s private credit portfolio stood at 18.5% pa in the first half of 2022, and its FIDC (Ulend Fundo Investment in Credit Rights) presented returns of CDI + 6% pa in the senior shares and CDI + 8% pa in the mezzanine”.
Reinforcement, the greater return is accompanied by greater risk. So, if you are an initial investor and are more conservative, FGC guaranteed bank bonds are the best alternative to balance return and risk in fixed income.
Michael Viriato is an investment advisor and founding partner of Investor’s House
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I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
