Introduction to Fixed Income and Variable Income

What is fixed income?

Abbreviated as FI by ABBREVIATIONFINDER, fixed income investment is one in which the yield is fixed by some index and the profitability can be predictable while the money is invested.

This type of investment is known to have lower associated risks, when compared to variable income.

The most common example of fixed income is traditional savings, where the money saved yields a rate offered by the bank.

How Fixed Income Investment Works

In fixed income investments, the remuneration rules are defined at the moment of application, due to factors such as terms and rates for income.

Simply put, investing in fixed income works like a loan that we make to an institution, with the capital plus interest being returned after the established term.

Private institutions use capital to reinvest in the financial sector, while the government uses capital for public investments.

This remuneration is known to those who invest, and fixed income is based on two types of income:

  • Fixed: the money invested yields an exact rate;
  • Post-fixed: the money invested yields a rate that is variable, so the investor only knows the entire amount at the end.

A well-known fixed-rate investment is the Prefixed Treasury, where the yield is known since the beginning of the investment. The Selic Treasury, for example, yield depends on an index, which in this case is Brazil’s basic interest rate.

Types of fixed income investments

In addition to the savings offered by banks, there are different types of fixed income investments, such as:

  • CDB – Bank Deposit Certificate;
  • LCI and LCA – Letters of Credit for Real Estate and Agribusiness;
  • LC – Bill of Exchange;
  • Direct Treasury;
  • Debentures;
  • Fixed income funds.

The remuneration that these investments provide can vary according to the market in which the money is destined. In addition, the taxes levied on each of them.

It is necessary to remember that in some of these investments there is no income tax collection, as is the case with LCIs and LCAs.

Advantages and Disadvantages of fixed income

Having a fixed income investment can be advantageous for more conservative investors, who are risk averse.

In addition, some investments offer credit risk protection through the Credit Guarantee Fund (FGC). For it, there is a reimbursement of up to R $ 250 thousand in the case of the financial institution, where the money was invested, declaring bankruptcy.

An investment in fixed income, however, may not yield as much as an investment in variable income, as in the case of stock market shares, for example.

What is variable income?

An investment is known to be of variable income when it is not possible to predict with certainty the profitability that will be obtained during the time of application.

In addition, in the end, the money invested may be less than that invested since this type of investment has more associated risks than fixed income.

Types of variable income investments

In the variable income market, corporate stocks are the most dominant. For them, it is possible to acquire a part of the domain of a company, receiving in return part of its profits through dividends.

In addition to shares, there are other investments in which the associated income is variable, such as those involving foreign exchange, derivatives or commodities, for example.

Variable income is also present in joint investments, such as Variable Income Funds, Equity Funds or Multimarket Funds.

How to invest in variable income

This type of investment, mainly shares, is organized and distributed by the São Paulo Stock Exchange (Bovespa).

To invest, you must have an account with a brokerage authorized by Bovespa and acquire the assets that the investor chooses.

It must be remembered that variable income has associated risks, since it depends on the income associated with the investment. Acquiring shares in a company the profitability of the asset depends on the ability to achieve the profits of that company.

Advantages and Disadvantages of variable income

This investment can present advantages, mainly for investors more able to the financial market, since the return, although uncertain, is generally very high.

The uncertainty of this investment can be considered as a major disadvantage, suitable for investors who risk more.

Even so, it is possible to create an investment portfolio that contains variable and fixed income assets, according to the investor profile. The fixed income in the portfolio serves as a “protection” and diversifies the risk.

Fixed Income