Most investment conversations focus on shares and property. Fixed income gets less attention, yet for many Australians it is the part of the portfolio that pays the bills, steadies the ride when markets fall, and holds the money that cannot afford to be lost.
The term covers a wide range of investments. A term deposit with a major bank and a perpetual hybrid security are both commonly described as fixed income, but they carry very different risks. Treating them as interchangeable is one of the more expensive mistakes income-focused investors make.
This guide explains how term deposits, bonds and hybrids work in Australia, how each is taxed, what the risks really are, and how they fit into a broader investment strategy.
Fixed income at a glance
The table below compares the four main types of fixed income available to Australian investors.
| Term deposits | Government bonds | Corporate bonds | Hybrid securities | |
|---|---|---|---|---|
| What you own | A deposit with a bank or other ADI | A loan to the Commonwealth or a state government | A loan to a company | A complex security with features of both debt and equity |
| Capital protection | Government guarantee up to $250,000 per account holder per ADI | No guarantee, but very low default risk | None, depends on the issuer | None, can be converted to shares or written off |
| Income | Fixed interest, set at the start | Fixed or inflation-linked coupons | Fixed or floating coupons | Usually floating, often franked, and can be cancelled |
| Can the value fall? | No, if held to maturity | Yes, if sold before maturity when rates have risen | Yes, with rates and credit conditions | Yes, and they can behave like shares in a crisis |
| Access to your money | Locked for the term, break fees or notice periods apply | Tradeable | Tradeable, but liquidity varies | Tradeable on the ASX, but liquidity can dry up |
| Ranking if the issuer fails | Depositors rank first | Not applicable in practice | Ahead of shareholders | Just ahead of ordinary shareholders |
| Typical role | Cash reserves, short-term goals | Defensive ballast, diversification | Income with moderate risk | Higher income, with equity-like risk |
The pattern is straightforward. As you move from left to right, the income generally rises and so does the risk. The mistake is assuming the income rises faster than the risk.
What fixed income is and why it matters
When you buy shares, you own part of a business and share in its profits and losses. When you invest in fixed income, you lend money to a bank, government or company in return for interest and, at the end of the term, the return of your capital.
That difference gives fixed income three roles in a portfolio:
- Income. Regular, predictable interest payments, useful for retirees drawing on their portfolio and anyone who needs cash flow.
- Stability. High-quality fixed income moves far less than shares, and government bonds have often held their value or risen when share markets have fallen sharply.
- Capital preservation. Money needed within the next few years, or money that would be painful to lose, generally belongs in defensive assets rather than growth assets.
The trade-off is lower long-term returns. Fixed income rarely matches shares over long periods, and after tax and inflation, the real return on cash and short-term deposits can be thin or even negative. Our guide on whether to invest or keep money in cash explores that balance.
Term deposits
A term deposit is the simplest form of fixed income. You lodge a sum with a bank, building society or credit union for a set period, typically one month to five years, at a fixed rate of interest. At the end of the term you receive your money back with interest.
How safe are term deposits?
Deposits with Australian authorised deposit-taking institutions (ADIs) are covered by the government’s Financial Claims Scheme, which protects up to $250,000 per account holder per ADI. The limit applies across all your accounts with the same institution, and some banks operate several brands under one banking licence, so spreading money across brands owned by the same bank does not increase your protection.
Within that limit, a term deposit is about as close to risk free as an Australian investor can get.
The limitations
Your money is locked away. Most term deposits now require notice of 31 days or more to break early, and charge an interest adjustment if you do.
Reinvestment risk. When a term deposit matures, you reinvest at whatever rate is available at the time. If rates have fallen, your income falls with them. Retirees who relied heavily on term deposits through the low-rate years of the late 2010s and early 2020s felt this directly.
Inflation and tax. Interest is taxed at your marginal rate. For someone on the 37% rate, a 4.5% term deposit returns less than 3% after tax, before inflation is considered.
Term deposits work well for emergency funds, money set aside for a known expense, and the cash portion of a retiree’s portfolio. They are rarely the right home for long-term wealth. Our guide on how much to hold in shares versus cash covers how to size that allocation.
Bonds
A bond is a loan to a government or company for a fixed period. The issuer pays interest, known as the coupon, at regular intervals and repays the face value at maturity.
Government bonds
The Commonwealth issues Treasury Bonds and Treasury Indexed Bonds, and each state issues its own bonds through its treasury corporation. Australian Government bonds are among the highest-quality bonds in the world. Retail investors can buy certain Commonwealth bonds directly on the ASX as Exchange-traded Treasury Bonds and Exchange-traded Treasury Indexed Bonds, or gain exposure through bond funds and ETFs.
Treasury Indexed Bonds adjust their capital value in line with the Consumer Price Index, providing direct protection against inflation, which few other investments offer.
Corporate bonds
Corporate bonds are issued by companies, including banks, to raise money. They pay a higher yield than government bonds to compensate for the risk that the company cannot repay. That extra yield is called the credit spread.
Bonds are generally grouped into investment grade (higher credit ratings, lower risk) and high yield (lower ratings, higher risk and higher income). High-yield bonds can behave much more like shares during a downturn, which defeats the purpose of holding defensive assets.
Most Australian corporate bonds trade in the wholesale market in large parcels, so retail investors usually access them through managed funds, ETFs or exchange-traded bond units that pass through the returns of an underlying bond.
How bond prices move
This is the part most investors find counterintuitive. When interest rates rise, the price of existing bonds falls. When rates fall, bond prices rise.
The reason is simple. If you hold a bond paying 3% and new bonds are now paying 5%, nobody will pay full price for yours. Its price falls until its effective yield matches the market. The longer the time until a bond matures, measured by its duration, the more its price moves when rates change.
If you hold an individual bond to maturity and the issuer does not default, you receive the face value regardless of what happened to its price in between. Bond funds, by contrast, have no maturity date, so their unit prices rise and fall with rates on an ongoing basis.
Investors learned this the hard way in 2022, when rapidly rising rates pushed bond prices down at the same time as share markets fell. It was a reminder that bonds are defensive, not immune. Over most longer periods, however, high-quality bonds have provided a useful offset when shares come under pressure, as our article on what happens to shares during a market crash discusses.
Australian and global bonds
The Australian bond market is small and concentrated in government and bank issuers. Global bond funds give access to a far broader range of issuers, sectors and economies, which supports the same case for global diversification that applies to shares. Global bond funds are usually hedged to the Australian dollar, because currency movements can easily overwhelm the modest returns bonds provide. Our guide on hedged versus unhedged ETFs explains why that matters more for bonds than for shares.
Hybrid securities
Hybrids sit between debt and equity. They pay a regular income like a bond, typically a floating rate set at a margin above the bank bill rate, and that income is often franked. But they carry features that can turn them into shares or cause investors to lose their capital.
How bank hybrids work
Most listed hybrids in Australia have been issued by the major banks as Additional Tier 1 (AT1) capital. Their key features include:
- Discretionary distributions. The bank can stop paying distributions, and missed payments are generally not made up later.
- No fixed maturity. Most are perpetual. Investors usually expect them to be redeemed at the first call date, but the bank is not obliged to do so.
- Conversion and write-off triggers. If the bank’s capital falls below a set level, or APRA determines the bank is non-viable, the hybrid can be converted into ordinary shares, usually at a time when those shares have fallen sharply. If conversion cannot occur, the hybrid can be written off entirely.
- Low ranking. Hybrid holders rank behind depositors and bondholders, just ahead of ordinary shareholders.
The franked income is a large part of the appeal, particularly for retirees and SMSFs who can receive the value of franking credits as a refund. But hybrids are not term deposits with a better rate. ASIC has repeatedly warned that retail investors underestimate their risks, and the 2023 write-off of Credit Suisse’s AT1 securities showed how quickly that risk can materialise overseas.
The APRA phase-out of bank hybrids
In December 2024, APRA announced that banks will phase out AT1 hybrids as eligible regulatory capital, replacing them with simpler and more reliable forms of capital. The framework has since been finalised and takes effect from 1 January 2027, with existing bank hybrids expected to be redeemed at their call dates by 2032.
For investors, this means:
- Existing bank hybrids continue to pay distributions on their current terms until they are called.
- New issuance of bank hybrids is expected to largely cease, so the listed market will shrink steadily.
- Liquidity may thin as the market contracts, which can make selling at a fair price harder.
- Hybrids issued by insurers and non-bank companies are not affected by the change.
Anyone relying on bank hybrids for income will need to decide where that money goes as securities are redeemed. The replacement options, such as Tier 2 subordinated bonds, senior bank bonds, credit funds or franked dividend shares, each change the risk and tax profile of the portfolio in different ways.
How fixed income is taxed
Term deposit and bond interest is assessable income, taxed at your marginal rate in the year you receive it (or, for longer term deposits, as it is credited). There is no franking and no CGT discount on interest.
Gains and losses on bonds sold before maturity are usually treated differently from shares. Most interest-bearing securities are classified as traditional securities for tax purposes, which means gains are taxed as ordinary income rather than as capital gains, and losses are generally deductible against other income. The capital gains tax rules, and the changes to them from 1 July 2027, are less relevant to direct bond holdings than many investors assume.
Hybrid distributions from banks and many other issuers are generally franked, so investors receive a franking credit alongside the cash distribution. Whether a franking credit is fully usable depends on your circumstances, including the holding period rules.
Bond funds and ETFs pass through their taxable income as distributions, which may include interest, realised gains and foreign income components.
Holding fixed income inside super can be tax-effective, because earnings are taxed at a maximum of 15% in accumulation phase and 0% in retirement phase. Our guide to tax on investments covers how different investment income is treated.
How to invest in fixed income
Directly. Term deposits are bought through a bank. Exchange-traded government bonds and hybrids are bought through a broker on the ASX. Direct holdings give you certainty about maturity and income, but concentration risk can be high if you only hold a few issuers.
Through managed funds and ETFs. Bond funds give diversified exposure across many issuers, maturities and countries, with professional management of credit and interest rate risk. They suit most investors who want fixed income as a portfolio building block rather than a set of individual securities. Our comparison of managed funds and ETFs covers how advisers choose between them.
Inside super or a pension account. Most superannuation investment options already include fixed income. It is worth checking what your fund holds before adding more outside super, so you know your true overall allocation.
How much fixed income should you hold?
There is no single right answer. The allocation depends on your age, how soon you need the money, your income needs, your tolerance for volatility and what else you own.
As a general pattern, younger investors with long timeframes hold relatively little, because they can ride out share market falls and benefit from higher long-term growth. Those approaching or in retirement typically hold more, because a large market fall shortly before or during drawdown can do lasting damage. Many retirees hold several years of planned withdrawals in cash and fixed income so they are not forced to sell shares in a downturn.
Our guide on asset allocation at different ages sets out common ranges. Once an allocation is set, it needs maintaining, because a strong year for shares quietly reduces your defensive buffer. Our article on when to rebalance your portfolio explains how to keep it on track.
Common fixed income mistakes
Chasing the highest yield. A higher yield is compensation for higher risk. If a fixed income product pays substantially more than a term deposit, it is worth working out exactly why before investing.
Treating hybrids as defensive. Hybrids can fall sharply in a crisis, at the same time as shares. Counting them as part of a defensive allocation can leave a portfolio far riskier than intended.
Ignoring interest rate risk. Long-duration bond funds can lose value when rates rise. Matching the duration of your bonds to your timeframe matters.
Exceeding the Financial Claims Scheme limit. Large balances with a single bank, or across brands that share one banking licence, may be only partly protected.
Holding too much in cash for too long. Safety has a cost. Over long periods, an overly conservative portfolio can fail to keep pace with inflation and living costs, which is its own kind of risk. Our article on investment mistakes we see time and time again covers this and others.
Where professional advice adds value
Fixed income looks simple from the outside, but the decisions within it are not. Choosing between term deposits, government bonds, credit and hybrids involves trade-offs between income, liquidity, interest rate risk, credit risk and tax that depend entirely on your circumstances. The phase-out of bank hybrids means many income-focused investors will need to rethink where a significant part of their portfolio sits over the next few years.
A financial adviser can assess how much defensive exposure your portfolio actually needs, identify where risk is hiding in products marketed as income investments, and structure your holdings across personal names, super and pension accounts so the after-tax result is as strong as possible. Fixed income is most effective when it is designed as part of a complete investment portfolio, not bought on its own.
If you would like help working out the right mix of defensive and growth assets for your situation, our investment advice and portfolio structuring team in Adelaide can help. You can also read more about how Money Path approaches investment strategy.
Frequently asked questions
Are term deposits guaranteed in Australia?
Term deposits with Australian authorised deposit-taking institutions are protected by the government’s Financial Claims Scheme up to $250,000 per account holder per institution. The limit applies across all your deposits with the same institution, including different brands operating under the same banking licence. Amounts above the limit are not guaranteed.
Can you lose money investing in bonds?
Yes. If interest rates rise, the market price of existing bonds falls, so selling before maturity can result in a loss. Bond funds have no maturity date, so their unit prices move with rates continuously. Corporate bonds also carry the risk that the issuer defaults. Holding a high-quality individual bond to maturity removes most of the price risk, but not the credit risk.
Are hybrids safer than shares?
Not necessarily. Hybrids rank just ahead of ordinary shares if the issuer fails, and bank hybrids can be converted into shares or written off if the bank’s capital falls too low. Distributions can also be cancelled. In normal markets they are less volatile than shares, but in a crisis they can fall sharply at the same time as shares.
What happens to bank hybrids after the APRA phase-out?
APRA’s framework takes effect from 1 January 2027, and existing bank hybrids are expected to be redeemed at their call dates by 2032. Until then, they continue to pay distributions on their existing terms. New bank hybrid issuance is expected to largely stop, so investors will need to reinvest redemption proceeds elsewhere. Hybrids issued by insurers and non-bank companies are not affected.
How is bond income taxed in Australia?
Interest from bonds and term deposits is taxed at your marginal rate. Gains on most bonds sold before maturity are treated as ordinary income under the traditional securities rules rather than as capital gains, so the CGT discount does not apply, and losses are generally deductible. Inside super, earnings are taxed at up to 15% in accumulation phase and 0% in retirement phase.
Are investment bonds the same as bonds?
No. Despite the name, investment bonds are tax-paid insurance-based investment products, not loans to a government or company. They can hold shares, property or fixed income, and they offer a specific tax treatment after ten years. They are a separate strategy from fixed income and are covered in our guide to understanding investment bonds.
How much of my portfolio should be in fixed income?
It depends on your age, timeframe, income needs and tolerance for volatility. Younger investors with long horizons often hold relatively little, while retirees typically hold more to fund several years of withdrawals and avoid selling shares in a downturn. Because super funds already include fixed income, it is worth looking at your total position across all accounts before deciding.
General advice warning. This article contains general information only and does not take into account your objectives, financial situation or needs. It is not a recommendation to buy, sell or hold any financial product. Interest rates, product features, regulatory settings and tax rules can change. Hybrid securities and corporate bonds can lose value, and past performance is not a reliable indicator of future performance. You should consider whether the information is appropriate for you, read the relevant product disclosure statement and seek personal financial and taxation advice before acting on any of it. Money Path Pty Ltd is a Corporate Authorised Representative (No. 001306822) of Australia National Investment Group, AFSL 522028.
