Balance is the key to almost everything in life. For every Sunday binge, you must follow up with a healthy diet and workout. For every shopping spree, you must save later to make sure you do not upset your budget. And, for all the risk you add to your investment portfolio in search of high returns, you can also add fixed income funds for maintaining stability.
Let’s know more about fixed income funds and how they can be used effectively.
What are fixed income funds?
Fixed income funds are mutual fund schemes that primarily invest in fixed income securities such as government bonds, corporate bonds, treasury bills, and other debt instruments. These funds aim to deliver stable and predictable returns by earning interest from the underlying securities. Fixed income mutual funds are especially suited for investors seeking lower risk and consistent income, as they are less volatile compared to equity-oriented funds.
A fixed income fund is a type of investment that can offer steady or stable returns. These funds are considered to be relatively stable and can be used to lower investment risks. They can deliver consistent interest and dividends irrespective of the market situation.
Fixed income funds can be categorised into multiple types. Let’s find out more about them.
Types of fixed income funds
There are various types of fixed income mutual funds, each catering to different investment needs:
- Liquid Funds: Invest in ultra-short-term fixed income securities and offer high liquidity.
- Short-Duration Funds: Suitable for 1–3 year horizons with moderate risk.
- Corporate Bond Funds: Focus on high-rated corporate debt ( only on in AA+ and above rated corporate bonds ) for stable returns.
- Gilt Funds: Invest only in government securities, ideal for low credit risk.
- Dynamic Bond Funds: Actively manage maturity based on interest rate trends.
o Bond Exchange Traded Funds (ETFs):
ETFs are a basket of securities that are traded directly on the stock market. They offer the ideal blend of mutual funds and stocks. There are a number of ETFs, out of which bond ETFs are fixed income funds that invest in different types of debt securities. These passive funds carry low to moderate risk and can offer a steady income.
o Debt mutual funds:
This type of mutual fund invests the majority of its assets in fixed income securities like government securities, certificates of deposits, corporate bonds, etc. Debt mutual funds have 16 classifications as per the Securities and Exchange Board of India, including money market funds, gilt funds, short-duration funds, ultra-short-duration funds, etc.
o Bond Fund of Funds (FOFs):
FOFs are mutual funds that invest in other funds instead of stocks or bonds. Bond FOFs are open-ended target maturity funds of funds that invest in the bonds of other public sector companies. They carry moderate risk and can offer exposure to multiple companies with a single investment.
Benefits of fixed-income funds
Investing in fixed-income mutual funds offers several benefits:
- Predictable income from interest payments
- Lower volatility compared to equities
- Capital preservation for cautious investors
- Diversification within a mixed portfolio
- Suitable for conservative and goal-based planning
- Fixed income mutual fund returns tend to be stable over time
o Low risk:
Fixed income funds are low-risk investments that help in diversification and mitigating risk.
o Source of income:
Fixed income funds offer regular income in the form of interest or dividends that can be used for your varied financial goals.
o Capital preservation:
These funds can be ideal for capital preservation. With guaranteed returns, they help you avoid risk, protect your capital, and maintain your wealth.
Why Invest In Fixed Income Funds?
Fixed income funds are well-suited for conservative investors who prioritise capital safety and income over high growth. These funds offer consistent returns, reduce overall portfolio risk, and help maintain stability during market downturns. For Indians nearing retirement or looking to diversify equity-heavy portfolios, fixed income mutual funds provide dependable solutions.
How to invest in fixed income funds?
You can invest in fixed income funds directly through an asset management company. You can make a lump sum investment or start an SIP (Systematic Investment Plan) that lets you invest small amounts periodically.
Investing in fixed income mutual funds is simple and can be done via:
- Selecting a trusted fund house or investment platform
- Completing the KYC process online or offline
- Choosing a scheme that matches your horizon and risk profile
- Investing via Systematic Investment Plan (SIP) or lump sum
- Monitoring performance and aligning with goals is key to success in fixed income funds.
Components Of Fixed-Income Funds
Core components of fixed income mutual funds include:
- Underlying bonds – such as government or corporate
- Interest income – regular earnings from bond coupons
- Credit ratings – indicating issuer’s repayment ability
- Maturity – the time until bonds are repaid
- Duration – sensitivity to interest rate changes
All these influence fixed income mutual fund returns and risk levels.
What Are The Returns On Fixed Income Mutual Funds And How Are They Calculated?
Fixed income mutual fund returns come from two main sources: interest earned on the underlying fixed income securities, and capital gains or losses from changes in bond prices due to interest rate movements. Returns are typically moderate but more stable than equity. Total returns can be tracked using annualised yield or trailing return metrics.
Taxability On Fixed-Income Mutual Funds
Fixed income mutual funds are taxed as per investor’s income slab.
Is The Option Of SIP Available In Fixed-Income Mutual Funds?
Yes, you can invest in fixed income mutual funds through Systematic Investment Plans (SIPs). This allows disciplined and regular investing, ideal for salaried individuals. SIPs reduce the impact of interest rate fluctuations and make fixed income funds more accessible, especially for those aiming for steady income and capital safety.
What Is The Interest Paid In Fixed-Income Mutual Funds?
Fixed income mutual funds earn interest through their investments in fixed income securities like bonds. This interest is not paid out directly unless you opt for an income payout plan; instead, it is reinvested, contributing to fund growth. The consistent interest flow forms the basis of fixed income mutual fund returns.
Are Fixed-Income Funds Risky?
While safer than equities, fixed income mutual funds are not risk-free. Risks include credit risk (default by issuer), interest rate risk (price fluctuation), and liquidity risk. However, well-managed fixed income funds with quality fixed income securities offer better capital stability. Investors should assess fund ratings and duration to manage risk exposure.
Conclusion
Fixed income funds are suitable for low to moderate risk appetites. They are also ideal for diversification. However, before you go ahead and invest in them, make sure you understand the different types and pick the one most aligned with your needs. An SIP or lumpsum calculator can also help you make a better choice in regard to your investment.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME-RELATED DOCUMENTS CAREFULLY
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
