Fixed income: types and returns

If you are starting to invest or want to better organize your portfolio, fixed income is usually the first step. It is considered more predictable than variable income (equities) because, in most cases, you already know (or have a solid estimate of) how much you will receive at maturity. This does not mean an absence of risk, but it does mean clearer rules.

In the Brazilian context, with the Selic (Brazil's benchmark interest rate) historically at elevated levels, fixed income has once again taken center stage in the portfolios of those seeking predictability without giving up competitive returns. In this article, we will break down the main types of fixed income available, how yields are calculated, and what to evaluate before investing your money.

What is fixed income, after all

Fixed income is an investment category where, at the time of purchase, there are already defined rules on how the return will be calculated. This can be a fixed rate (for example, 12% per year), a floating rate pegged to a benchmark (such as the CDI—Interbank Deposit Certificate—or the Selic), or a combination of the two, as in the case of hybrid bonds linked to the IPCA (Brazil's official consumer inflation index) plus a fixed rate.

This differs from variable income, such as stocks, where returns depend on company performance and market conditions, without any prior guarantee. In fixed income, you are essentially lending money to an entity—the government, a bank, or a corporation—and receiving interest in return.

Fixed-rate, floating-rate, and hybrid

Fixed-rate bonds have an interest rate determined at the time of purchase that remains unchanged until maturity. They are attractive when you expect interest rates to fall in the future, as you lock in the current, typically higher rate.

Floating-rate bonds track a benchmark, with the CDI being the most common for CDBs and the standard yardstick for comparing products. Hybrid bonds, on the other hand, combine a fixed component with inflation adjustments (IPCA), preserving the investor's purchasing power over time—as is the case with Tesouro IPCA+.

Tesouro Direto, CDB, LCI, LCA, and debentures

Tesouro Direto (the federal government's direct retail bond program) is the most popular entry point, enabling investments starting from small amounts in federal public bonds, typically with daily liquidity. CDBs (Certificados de Depósito Bancário, or Bank Deposit Certificates) are issued by banks and usually offer yields pegged to a percentage of the CDI.

LCIs and LCAs are Real Estate and Agribusiness Credit Notes, respectively, which are exempt from Income Tax for individual investors, potentially offsetting a slightly lower nominal yield. Debentures are corporate debt securities with higher return potential, but also with more significant credit risk—it is always advisable to review the issuer's financial health.

How Income Tax works

For most taxable fixed-income investments, such as Tesouro Direto and CDBs, a regressive Income Tax table applies: the rate starts at 22.5% for investments held up to 180 days and progressively drops to 15% for terms exceeding 720 days. This highlights the importance of considering your investment horizon before selecting a product.

It is also worth noting the IOF (Tax on Financial Operations), charged only on redemptions made within 30 days, which discourages ultra-short-term transactions. Understanding these rules prevents surprises when calculating the actual net return on your investment.

The role of the FGC in investment safety

The FGC (Fundo Garantidor de Créditos, Brazil's deposit guarantee fund) protects investments like CDBs, LCIs, and LCAs up to R$ 250 thousand per individual (CPF) and per financial institution, subject to an aggregate limit of R$ 1 million every four-year period. This guarantee substantially mitigates credit risk for retail investors, but it is not unlimited—which is why diversifying across different institutions is a best practice for those investing larger sums.

Tesouro Direto, by contrast, is backed directly by the federal government, making it the investment with the lowest credit risk in the country.

Conclusion

Fixed income offers a spectrum of alternatives that extends far beyond the traditional savings account (poupança). Understanding the distinction between fixed-rate, floating-rate, and hybrid securities, alongside applicable taxes and coverage mechanisms, helps you formulate a strategy aligned with your objectives and time frame.

There is no single product suitable for everyone: the optimal approach is to blend different fixed-income vehicles based on your liquidity needs and risk tolerance, always evaluating rates before committing capital.

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