Fixed income investments provide a stable and predictable level of income many investors find reassuring. They pay a set rate of interest that does not change, regardless of the prevailing economic environment, and also have a fixed repayment date. Bond prices are influenced by fluctuations in interest rates and the rate of inflation. In addition, corporate bond prices are also affected by individual company or industry newsflow.

Changes to UK base rates, which are set by the Bank of England’s Monetary Policy Committee, will affect the level of interest paid on cash in a UK bank deposit account, but base rates will not affect the level of income paid on a bond. In an environment of rising interest rates, bonds become less attractive, because investors can more easily achieve a competitive rate of interest from their cash deposits.

Similarly, low interest rates increase the appeal of bonds, as it becomes harder for savers to generate an attractive level of income from their cash deposits. Funds investing in such bonds are freely available, of course, care should be taken in choosing the best-suited one that fits-the-bill. See, “Collective Bond Funds, below.

A cash deposit account might be the first port of call for many investors who want to generate an income. In an environment of low interest rates, however, it is difficult for savers to generate a meaningful return from their cash deposits. How times have changed! Furthermore, the impact of inflation will erode the purchasing power of their capital over the longer term.

As the name suggests, government bonds are issued and underwritten by a government. UK government bonds – also known as ‘gilts’ – may be regarded as lower risk investments as, to date, the UK has never defaulted on its debts.

However, because they are a low-risk investment, the level of return available on gilts tends to be relatively low and they offer little protection against inflation. Index-linked bonds are the only exception – they pay a rate of income that is partly influenced by the rate of inflation. If the rate of inflation rises, the level of income they offer is adjusted upwards while, in an environment of falling inflation, the level of income paid will fall.

Corporate bonds are issued by individual companies as a way of raising capital for their businesses. As with gilts, a corporate bond is redeemed at a predetermined date for a fixed sum and, during the life of the bond, the investor receives a fixed amount of interest.

Corporate bonds carry a higher level of risk than UK government bonds but that level will vary from one company to the next. High-quality companies are regarded as relatively low-risk, whereas lower-quality companies are believed to have a higher risk of defaulting on their obligations to bondholders.

The level of income paid to bondholders tends to reflect the level of risk involved. Investors who take on a riskier investment are compensated for that risk with a higher level of income. If a company should go bust, bondholders rank higher than shareholders as the company has to meet all its obligation to its creditors – including bondholders – before it considers its shareholders.

It is important to understand the risks of investing in corporate bonds. There can be a substantial difference in quality between one corporate bond and the next. Many of the large fund management houses undertake research to evaluate the potential risk of each bond, but they also often rely on research produced by credit-rating agencies such as Standard & Poor’s, Moody’s and Fitch. These companies assign a rating to companies that offer bonds. A high credit rating indicates the company is believed to have a low risk of default while a lower credit rating suggests the company presents a higher risk of default.

Bonds may be divided into two classes – ‘investment-grade’ for the highest credit ratings and ‘sub-investment-grade’ (also known as ‘high yield’ or sometimes ‘junk’) for the lower grades. A lower credit rating means a higher level of income paid, in order to compensate for the extra risk involved. Generally, investment-grade bonds are seen as a relatively lower-risk asset class, while higher-yielding sub-investment-grade bonds are regarded as higher risk.

Collective funds that focus on government and/or corporate bonds will invest in a managed portfolio that can help you to reduce your risk by diversifying across a range of investments, rather than owning just one or two. Some funds will focus on a specific area of the market while ‘strategic’ bond funds are ‘go-anywhere’ portfolios, whose managers take a view on the bond market and focus on the areas they believe offer most value. If you are interested in adding an element of additional risk to your overall portfolio, therefore, strategic bond funds can offer an introduction to the sub-investment-grade arena or to overseas opportunities.

Over the long term, equities offer the potential for superior returns compared with many other major asset classes. An equity income strategy focuses on shares in companies that pay consistently high and rising dividends and typically aims to generate a consistent, above-average income stream, accompanied by the potential for capital growth over the long term.

Dividends are paid – usually in cash – by companies to investors and are taxable. By law, dividend payments must be paid out of the company’s profits or from profits generated in previous years. Companies are not obliged to pay a dividend, but a high dividend payout can provide an incentive for investors to take a stake in the company.

A company does not have to pay a dividend, and many, particularly small- and medium -sized ones, prefer to reinvest surplus cash into the business. The profits of a relatively young company, for example, can be unpredictable as it seeks to establish itself – and any profit it does make will probably be used either to repay start-up costs or as a reinvestment to help growth. Even as a company grows older, its management might decide to retain profits to finance debt, expansion or product development.

Longer-established companies tend to pay higher dividends – hence an equity income strategy tends to focus on large, high-quality companies, rather than smaller, younger firms. Nevertheless, a small but rising proportion of dividend payouts are coming from medium-sized and smaller companies.

Even large, well-established companies can fall on hard times, however, and the management might decide to shore up their firm’s finances by reducing its dividend payout or cancelling it completely. Furthermore, a diminished or cancelled dividend will undermine confidence in the company and its share price is likely to be negatively affected, cutting the value of your capital investment.

While there is a longstanding culture of dividend payments among UK companies, a growing number of companies in overseas markets are returning value to their shareholders in the form of dividend payouts. The US has, for example, traditionally been home to a core of large companies that pay high dividends. More recently, Asian companies have sought to attract and meet the needs of international investors by focusing on dividend payouts, with countries such as Hong Kong and Taiwan establishing solid dividend regimes in this exiting region of the world.

A global equity income approach has become increasingly achievable, and many investment houses have launched funds to tap into this trend. Equity income investors now have much greater scope to diversify across a broadening range of countries by investing in collective funds.

An equity income fund invests in the shares of companies that pay consistent and attractive dividends and then combines the dividend payouts in order to pay a regular income to investors. Diversification across a broad range of companies reduces the danger a single company’s decision to cut or cancel its dividend might drag down the overall yield of the portfolio.

As an asset class, property can polarise opinion. It is often viewed as a relatively illiquid asset in that it can be time-consuming and expensive to trade. Some experts also believe investors are already overexposed to the property sector if they own their own home or a buy-to-let property, or if they are invested in commercial property through their business. However, property can play a part in an income portfolio for those investors who are not overexposed or who are attracted to its potential benefits.

‘Buy-to-let’ is a popular means by which investors gain exposure to residential property. Traditionally, buy-to-let has enabled investors to generate income through rents negotiated on short-term tenancy agreements. More recently, many buy-to-let investors have chosen to use their rental income to finance their own mortgage payments and to wait for the bigger profit in the form of a capital gain when the property is sold. Of course, as some investors have found to their cost, there is no guarantee a property’s market value will rise over the long term as we’ve seen along the Costas.

In contrast, commercial property investment focuses principally on the generation of a high and consistent income that is generated through rents. Whereas residential leases typically operate on a series of short-term agreements, however, commercial leases tend to be much longer – perhaps 10 or 20 years.

Income from commercial property can derive from a variety of different sectors – ranging from City real estate, through shopping centres, to industrial parks and warehouses. Each sector commands a different level of rental yield and will react differently to the prevailing economic climate.

Direct investment in commercial property is very expensive but smaller private investors can access the asset class through diversified collective funds. Diversification helps to reduce the extent to which the loss of a tenant from one particular property might negatively affect the overall performance of the fund.

A real estate investment trust or ‘REIT’ is a company that manages a property portfolio on behalf of its shareholders. A REIT can contain residential and commercial property. Its profits are exempt from corporation tax, but it must pay out at least 90% of its taxable income to shareholders.