Top choices for fixed-income investments

Experts say it is one of those ways to earn a steady, reliable return on your money without taking big risks, making it a safer option compared to other investment types.
Currently, there are numerous fixed-income investment options including treasury bills, treasury bonds, corporate bonds, fixed deposits, savings bonds, unit trusts, pension funds, diaspora bonds and insurance-linked investment products among others.

Many of these are associated with the affluent because they often require larger amounts of money to get started and offer stable returns.
However, there are fixed-income investments that can be accessible to low-income earners, particularly for someone who has Shs5m or Shs10m and is looking for a safe place to invest it while waiting for their plans to take shape.

Fixed-income investments
When you receive that substantial amount of money, you might be tempted to dive into a fixed-income investment simply based on a friend’s recommendation. 

But, it is important to understand the different options available, as each type serves a distinct purpose and has unique features.
First, treasury bonds, which are considered to be very low-risk investments, offer periodic interest payments and a stable income over time ranging from two to 15 years while treasury bills are a short-term government security with maturities of 91, 182, or 364 days - short period.

Other bonds that share similar perceptions are corporate bonds and pension funds among others.
However, there are options for low-income earners, such as fixed deposits offered by commercial banks. These bonds are popular for their simplicity and ease of understanding.

Here, one deposits a specified sum of money for a fixed period and earns interest on it. This makes them a user-friendly option for those who may not be familiar with more complex investment instruments.

Last but not least, there goes the savings bonds, popular among Savings and Credit Cooperative Organisations because just like fixed deposits, they provide straightforward financial solutions and encourage a saving culture in Uganda.

Meanwhile, the increasingly popular unit trusts cater to investors seeking short-term returns, according to Ms Susan Khanzia, a chartered holder.
“Unit trusts offer flexibility with liquidity, allowing investors to withdraw funds without losing interest earned,” she explains. 

But the most significant stand out in unit trusts is, they offer diversification across various securities and assets, which can be tailored to different investment goals and timelines. It is this goal that generates favourable returns. 
Ms Grace Semakula, chief executive of SBG Securities, further explains: “A unit trust is an investment vehicle that allows you to pool your money with other investors, managed by a professional fund manager.’’

A unit trust operates like a large pool where multiple investors contribute their money. This pooled fund is then invested in a diverse range of assets, such as stocks, bonds, or real estate.

Each investor receives “units” in the trust, which represent their share of the overall investment. The purpose of a unit trust is to simplify the investment process by allowing individuals to invest in a variety of assets without having to select each one individually, thereby spreading out the risk.

Ms Semakula cites an example of the Stanbic unit trust which has three vehicles, that is, money market fund, a short-term product, currently earning an average of 10 percent; bond fund [medium to long term product] earning an average of 11.5 percent to 12 percent, and a balanced fund [long-term] product earning an average of 11.75 to 12.5 percent. 
After understanding the above, the next step is to choose the best option. 

While Ms Khanzia explains that the choice is based on factors such as functionality, liquidity, and risk, selecting the ideal option largely depends on the individual investor’s plans and objectives. 
“Unit trusts offer immediate liquidity, allowing you to withdraw funds any time without losing the interest earned so far. Currently, you might earn a higher return from a long-term bond compared to shorter-term investments. It comes down to personal preference: what are your financial goals, and how long can you commit to holding your money?” she adds. 

Risks
It is not all rosy in fixed-income investments. There are also some risks. 
For example, unit trusts, while considered lower-risk, are not entirely risk-free, Ms Khainza says, highlighting: “This risk is inherent, even in government treasury bills and bonds,” primarily due to interest rate risk. As interest rates rise, the value of existing bonds may fall, impacting their resale value if sold before maturity.”
Another concern is the issue of liquidity, which she says is common, especially in Uganda. 
“While government securities are low-risk, the bond market in Uganda faces liquidity challenges, making early exits difficult. For example, those purchasing bonds through banks engage in the secondary market rather than the primary market. As a result, you may not fully benefit from your investment,” explains Ms Khanzia.

Returns
After considering all the above factors, you should decide where to invest, keeping in mind that the choice should align with the investor’s specific goals and plans.
After evaluating all these factors, choose your investment based on how well it aligns with your specific goals and plans.
If you have a sum sitting idle, try to understand the actual returns.

“For those with a modest budget, such as Shs5m as our case study, both money market funds and bond funds offer viable fixed-income options. A bond fund with an average annual rate of 12.4 percent would yield approximately Shs620,000 over a year in a stable investment environment. However, rates in unit trusts fluctuate daily in response to changes in the interest rate environment,” Ms Semakula points out. 

While you might assume that an investment of Shs5m is modest, Mr Calvin David Bateme, the team leader for new markets at Crested Capital, has a different perspective.

“In the fixed income market, Shs5m—or Shs2m—can be a solid investment,” he says, “but it must not be a one-time action, which is a mistake many people make. They invest and remain inactive.”