Why fixed interest falls in value when interest rates rise?

Before we get into why a fund’s return might be negative, here’s some background about fixed interest investments.

Superannuation and investment funds can include an allocation to fixed interest investments in their investment strategy.

This is commonly part of the 'defensive' component of the portfolio, which is generally lower in risk and less volatile than 'growth' investments, such as shares and property that is listed on the stock exchange. 

This ultimately helps to diversify the overall risk and returns in a portfolio.

Fixed interest investments are issued by governments, banks and companies. A borrower, like the Australian Government, can borrow money in different ways, including fixed interest investments called bonds. Bonds pay investors regular interest at a fixed rate – called 'coupon payments'. The borrower promises to pay back the original amount borrowed to the investor at the end of the agreed period (such as 5, 10 or 15 years). Many bonds are listed on a financial exchange (such as the ASX) which means they can be traded (i.e. bought and sold). 

For investors, bonds offer the ability to lock in a better rate than 'at call' cash invested in a bank account or money market investments. The better rate that can be achieved than at call cash is because a bond is a riskier investment than cash.

^{It is important to consider that a change in investment option can mean that you lock in the fall in value of the investment. If you are still uncomfortable with the risk, CFS offers a broad range of range of investment options that may be suitable for you.}

^{For instance, depending on your personal circumstances, a cash option or a term deposit may be suitable for investing in the short to medium term as the returns should be more certain. And important to remember your superannuation money can be invested in a cash option or term deposit – super is not only for investing in the share market.}  

^{If you’re at pension stage, another option is a lifetime annuity or fixed term annuity, where the amount you will receive will be known in advance. Annuities can be for fixed terms or, alternatively, your lifetime.} 

^{Past performance is no indication of future performance.}

It is important to consider that a change in investment option can mean that you lock in the fall in value of the investment. If you are still uncomfortable with the risk, CFS offers a broad range of range of investment options that may be suitable for you.

For instance, depending on your personal circumstances, a cash option or a term deposit may be suitable for investing in the short to medium term as the returns should be more certain. And important to remember your superannuation money can be invested in a cash option or term deposit – super is not only for investing in the share market.  

If you’re at pension stage, another option is a lifetime annuity or fixed term annuity, where the amount you will receive will be known in advance. Annuities can be for fixed terms or, alternatively, your lifetime.