Understanding Fixed Income: How It Works and Its Benefits
Have you ever heard someone say they “put their money in fixed income” and wondered what that really means? This term often comes up in financial discussions but isn’t always clearly explained. Fixed income is one of the most popular investment categories in Brazil, especially for those starting to organize their finances or looking for alternatives to savings accounts.
Simply put, fixed income refers to investments where the rules of remuneration are set at the time of investment. This doesn’t mean the final return is always known in advance — as we’ll see in this article, there are different forms of remuneration — but you do know how your money will grow before you invest. This contrasts with variable income, like stocks, where returns depend on unpredictable factors and can fluctuate without a defined limit.
Understanding how fixed income works is an important step in making more informed financial decisions. In this article, you’ll learn the fundamental concepts, discover the main products available, understand how taxation works, and know what to evaluate before investing. Let’s start from the beginning.
What “Fixed Income” Means in Practice
When you invest in fixed income, you are essentially lending money to someone — it could be the federal government, a bank, or a company. In exchange for this loan, you receive remuneration, which we call interest. The issuer of the security sets the conditions: term, form of remuneration, and when the amount will be returned.
There are three main forms of remuneration in fixed income:
- Pre-fixed: the interest rate is defined at the time of investment. For example, you know you will receive a specific rate per year until the maturity of the security. The final amount can be calculated from the start, provided you hold the investment until the agreed term.
- Post-fixed: the return follows a reference indicator, usually the Selic rate (set by the Central Bank) or the CDI (Interbank Deposit Certificate, which historically is very close to the Selic). In this case, the exact amount is only known at maturity.
- Hybrid: combines a pre-fixed rate with an inflation index, usually the IPCA (Broad Consumer Price Index). For example, “IPCA + X% per year.” This type protects the purchasing power of your money over time.
To check the current Selic rate, visit the official website of the Central Bank of Brazil. The CDI can be consulted on B3 (b3.com.br). Never make decisions based on rates you read in an article without verifying if they are still in effect.
Main Fixed Income Products
The Brazilian market offers a variety of products within fixed income. Each has different characteristics, issuers, and protections. Here are the most common:
Tesouro Direto
Tesouro Direto is a program by the National Treasury that allows individuals to purchase federal government bonds online. It is considered the lowest credit risk investment in Brazil, as the issuer is the federal government itself.
The main securities available are:
- Tesouro Selic: post-fixed, ideal for emergency funds due to low volatility and daily liquidity.
- Tesouro Prefixado: rate defined at the time of purchase.
- Tesouro IPCA+: hybrid, protects against inflation.
Updated information on rates and prices of the securities can be found directly on the tesourodireto.com.br website.
CDB — Certificate of Bank Deposit
The CDB is issued by banks. When you buy a CDB, you are lending money to the financial institution. In return, you receive interest. The remuneration can be pre-fixed, post-fixed (usually a percentage of the CDI), or hybrid.
One of the most important protections of the CDB is coverage by the Credit Guarantee Fund (FGC), which guarantees up to R$ 250,000 per CPF per financial institution (with a global limit of R$ 1 million per CPF, renewable every four years). Check the updated rules on the official FGC website (fgc.org.br).
LCI and LCA
The LCI (Real Estate Credit Bill) and the LCA (Agribusiness Credit Bill) are securities issued by banks with a very attractive feature: they are exempt from Income Tax for individuals. They also have FGC coverage, with the same limits as the CDB. Generally, they require minimum grace periods for redemption.
Debentures
Debentures are securities issued by companies to raise funds. They offer the potential for higher returns but also higher credit risk, as they depend on the financial health of the issuing company. Incentivized debentures (for infrastructure projects) are exempt from IR for individuals. They do not have FGC coverage.
CRI and CRA
Real Estate Receivables Certificates (CRI) and Agribusiness Receivables Certificates (CRA) are securities issued by securitization companies. They are exempt from IR for individuals but do not have FGC coverage and are generally more suitable for investors with higher risk tolerance and a long-term horizon.
How Taxation Works in Fixed Income
Taxation is a point that many investors overlook and that directly impacts net returns. In Brazil, fixed income earnings are generally subject to two taxes: Income Tax (IR) and IOF (Tax on Financial Operations).
Income Tax
IR is levied on earnings (not on the total amount invested) and follows a regressive table: the longer you hold the investment, the lower the rate. The logic is as follows:
Investment Term IR Rate Up to 180 days 22.5% 181 to 360 days 20% 361 to 720 days 17.5% Over 720 days 15% This table applies to the main taxable products, such as CDB, Tesouro Direto, and common debentures. LCI, LCA, CRI, CRA, and incentivized debentures are exempt from IR for individuals. Always check the current rules at the Federal Revenue (gov.br/receitafederal).
IOF
IOF is levied on redemptions made within 30 days of the investment, decreasing over time: the closer to day 1, the higher the rate; on the 30th day, it drops to zero. Therefore, it is generally not worth redeeming fixed income investments in less than a month.
In most products, IR and IOF are withheld at source, meaning the bank or broker automatically deducts them.
Advantages and Risks of Fixed Income
No investment is perfect or risk-free. Fixed income has characteristics that make it suitable for many goals but also presents important limitations.
Advantages
- Predictability: you know the remuneration rules from the start.
- Variety: there are options for different profiles, terms, and goals.
- FGC Protection: in eligible products, there is a guarantee up to the established limit.
- Accessibility: it’s possible to start with low amounts, especially in Tesouro Direto.
- Variable Liquidity: some products, like Tesouro Selic, allow redemption at any time.
Risks and Disadvantages
- Credit Risk: if the issuer fails to pay (except for the National Treasury), you may lose part of the value. The FGC only covers certain products and up to certain limits.
- Market Risk: pre-fixed and hybrid securities may have their market value reduced before maturity if interest rates rise. If you need to sell before the term, you may receive less than you invested.
- Liquidity Risk: some products have a grace period and do not allow early redemption.
- Inflation: in periods of high inflation, a low pre-fixed rate may result in negative real returns.
- Taxation: IR reduces gross returns; it’s important to always compare net returns.
How to Start Investing in Fixed Income
If you’re thinking of taking the first steps, here’s a basic guide:
- Market Risk: pre-fixed and hybrid securities may have their market value reduced before maturity if interest rates rise. If you need to sell before the term, you may receive less than you invested.
- Variety: there are options for different profiles, terms, and goals.
- Tesouro Prefixado: rate defined at the time of purchase.
- Post-fixed: the return follows a reference indicator, usually the Selic rate (set by the Central Bank) or the CDI (Interbank Deposit Certificate, which historically is very close to the Selic). In this case, the exact amount is only known at maturity.
