Fixed income mutual funds are gradually attaining popularity among those investors looking for steady returns with minimum risk. Also known as debt funds, these are the mutual funds that capitalize in fixed income securities. Irrespective of your experience as an investor, it is vital to comprehend the key aspects of fixed income investments. Let’s get into more details on what is a fixed income mutual fund.
Fixed-Income Mutual Funds: Meaning
Fixed-income mutual funds are investment options that chiefly consist of fixed-income securities (like debentures, treasury bills, corporate bunds, government bonds, and several other debt instruments). They amass money from various investors and invest the same into a varied portfolio of bonds. These funds target to create regular income stream for investors. This is made possible with interest payment. In other words, fixed-income mutual funds are that recompense investors with dividend payments or fixed interest until their maturity date.
Let’s take an example to better understand fixed-income mutual funds India. Suppose a company offers a 5% bond with a face value of INR 1,00,000 and maturity period is 5 years. Let’s consider that this bond is available at a premium price of INR 1,06,000.
During the contract period, the company pays you interest payment as per interest rate of 5% per year. So, you get INR 6,000 per; when the maturity period ends, you get your initial amount of INR 1,00,000. Suppose you sell the bond in the market, for INR 1,09,000. So, you get a fixed interest rate of INR 6,000 for two years, as well as, a capital gain of INR 3,000 (1,09,000-1,06,000).
The following section discusses the major types of fixed income mutual funds.
Types of Fixed-Income Mutual Funds Investments
i. Government Bonds:
National government issues these bonds to fund infrastructure projects and public spending. They are one of the best fixed income mutual funds India because they offer high stability.
ii. Corporate Bonds:
These mutual funds invest in the debt instruments issued by corporations. They are one of the best fixed-income mutual funds if you want higher returns.
3. Municipal Bonds:
These funds invest in bonds issued by local governments or municipalities. These fixed-income mutual funds in India are suitable for investors belonging to higher tax brackets (20%).
Note: Investors willing to invest money for a long period but prefer less risky assets than equity funds can choose one of the SBI fixed income mutual funds.
Benefits of fixed-income mutual funds
- The best fixed-income mutual funds India provides a steady income stream for a particular investment period. They are decent choices for retirement portfolios.
- They offset volatility linked with equity investments and thus stabilize your investment portfolios.
- They ensure reduced risk to investors because they enable investment in various fixed income securities.
- In fixed-income mutual funds, you have to pay tax only when redeem the finds. You need to pay STCG (Short-Term Capital Gains) tax (as per the applicable income tax rate) if the investment period is less than 3 years. On the other hand, you need to pay LTCG (Long-Term Capital Gains) tax (20% with indexation benefit) if the investment period is more than 3 years.
- You get the freedom to withdraw your invested money whenever you want, without juggling with a lock-in period. But in such case, you may have to pay for exit load and some other expenses.
Drawbacks of fixed-income mutual funds
- These investment options are vulnerable to interest rate fluctuations, affecting the bond yields and prices.
- The market’s unpredictability can affect the interest amount obtained from the security.
- The inflation depletes the purchasing power of fixed income investments. So, your mutual fund fixed income plan may provide you reduced returns.
- Investors encounter the risk of issuer default, specifically with corporate debt securities and lower-rated bonds.
- The fixed income mutual fund returns are usually lower than equity funds. Hence, the potential for capital appreciation reduces.
- If the fixed income mutual funds interest rates rise then the value of fixed income securities might get lower. Consequently, it leads to reduced prices in the secondary market.
Key considerations before investing in Fixed Income Mutual Funds
You can keep in mind the following factors before purchasing fixed-income mutual funds.
- Select a fixed income mutual fund that suits your financial objectives. Decide whether you want to earn high returns or additional income.
- Take into account your investment duration since these funds have varied maturity periods.
- Review the expense ratio because it impacts your returns.
- Be wary of risks such as interest rate, liquidity, and credit risks.
- Determine the mutual fund’s consistency by analyzing its track record for last 5-10 years.
Is it good to invest in fixed income mutual funds in India?
If you don’t intend to explore equity and are aiming to grow your finds with low risk then fixed-income mutual funds can be a good option to consider.
These funds aim to provide regular and stable income streams. Hence, many investors opt for them over the riskier investment options (like equity) and less return options (like bank deposits). Note that these funds provide minimum 7% returns and up to 10%, based on the maturity period.
Why to seek service from a mutual fund distributor?
A mutual find distributor acts as the intermediary between mutual funds and investors. Also called mutual fund agents, they help in distributing and retailing mutual funds to retail investors. Let’s look at the benefits of working with a mutual fund distributor.
- A mutual fund distributor analyzes clients’ financial goals and risk tolerance to offer tailored investment guidance.
- They assess individual asset performance and market conditions to manage risks and maximize returns.
- They benefit clients with a hassle-free transaction experience by handling the required paperwork and compliance.
BeWealthy.in’s personalised mutual fund advisory:
BeWealthy.in is a well-known personalized mutual fund advisory that helps you to select from different types of fixed income mutual funds. It provides a tailored and comprehensive investment experience. The platform assesses a client’s needs and then presents unique insurance plans accordingly.
Equity based funds vs. Fixed-income mutual funds vs. FD
| Sr. No. | Point of Comparison | Equity based funds | Fixed-income mutual funds | FD |
| 1 | Meaning | These funds chiefly invest in stocks or shares of companies. | They invest in debt securities such as treasury bills, bonds, and several other money market instruments | FDs are financial instruments issued by banks and non-banking financial companies (NBFCs) wherein you deposit certain amount of money for a fixed duration, at a fixed interest rate |
| 2 | Risk and Return | High prospects for returns but higher risk when compared to FDs and fixed-income funds | Higher risk than FD but lower risk than equity funds Usually, returns are moderate and stable. | Extremely low risk due to which s FDs are regarded as one of the safest investments. Although returns are usually lower, they are guaranteed and fixed |
| 3 | Investment Horizon | Appropriate for long-term investments (>5 years) to overcome market volatility | Appropriate for medium-term investments (1-3 years) or higher, based on the fund type. | Flexible investment tenure, varying from a few months to few years. |
| 4 | Liquidity | High liquidity; however, selling during a market downturn could incur losses | Good liquidity; certain funds might have penalties or exit loads for early withdrawal | Limited liquidity; Premature withdrawal can incur lower interest and penalties |
Debt Funds
Debt Funds are a type of mutual funds that provide returns by extending your money as loans to companies and government. The risk level of these funds depends on the type of borrower and the lending duration. Usually, the investment horizon varies from 1 day to 3 years. Compared to FDs, they provide more post-tax returns (if your money stays invested for minimum 3 years).
List of Best Performing Debt Mutual Funds
| Sr. No. | Debt Mutual Fund | Expense ratio | Interest return (1 year) |
| 1 | Kotak Medium Term Fund | 0.66% | 8.92% |
| 2 | Kotak Bond Fund | 0.69% | 8.43% |
| 3 | Kotak All Weather Debt FOF | 0.07% | 8.82% |
| 4 | HDFC NIFTY G-Sec Jun 2036 Index Fund | 0.2% | 8.23% |
| 5 | SBI CRISIL IBX Gilt Index – June 2036 Fund | 0.28% | 8.12% |
| 6 | Nippon India Nifty G-Sec Jun 2036 Maturity Index Fund | 0.2% | 8.21% |
| 7 | Axis Strategic Bond Fund | 0.39% | 8.08% |
| 8 | Axis All Seasons Debt FoF | 0.23% | 7.93% |
| 9 | Aditya Birla Sun Life Medium Term Fund | 0.85% | 7.98% |
| 10 | ICICI Prudential Short Term Fund | 0.45% | 8.02% |
Conclusion:
For investors seeking financial stability, regular income, and decent growth prospects, fixed-income mutual funds are recommended investment option. Make sure to explore various top fixed income mutual funds and choose the one that best aligns with your investment objectives. These funds aim to secure your financial future. If you are confused on why to invest in mutual funds and want to get a comprehensive guide then read our next article.
FAQs
What amount of interest do you get by investing in fixed income mutual funds?
The interest that fixed income mutual funds pay differs based on the existing interest rates and the performance of the fixed income securities available in the fund’s portfolio. Generally, the interest rates vary from 7-10% based on the type of the fund and tenure.
What risk level do fixed-income mutual funds carry?
The fixed-income mutual funds boast a lower risk compared to equity funds, but a higher risk level compared pure debt funds owing to the amount invested in equity funds.
Do fixed-income mutual funds guarantee periodic returns?
These funds capitalize a huge amount in debut funds and present a lower risk level than equity-oriented funds. But they can’t assure periodic returns. The fund’s ability to allocate periodic returns depends on its available distributable reserves. It is subject to credit risk and interest rate.
How do fixed-income mutual funds provide diversification?
Fixed-income mutual funds provide diversification by distributing investments across different fixed-income securities (like corporate bonds, government bonds, etc.) decreasing the portfolio risk.
Will I lose money after investing in debt funds?
The debt funds target to preserve capital but they are not risk-free. The factors like interest rate change, inflation, and credit defaults can impact the value of the fund’s holdings and will lead to losses.
Common types of risks linked with fixed-income mutual funds
| Sr. No. | Type of risk | Effect on the investment |
| 1 | Market risk | The investment value drop due to inevitable risks affecting the whole market |
| 2 | Liquidity risk | The fund couldn’t sell an investment which drops in value since there are no buyers |
| 3 | Credit risk | In case a bond issuer can’t reimburse a bond, the investment will be futile |
| 4 | Interest rate risk | The fixed income securities’ value decline if the interest rates increase |
| 5 | Country risk | The foreign investment’s value decrease due to political amendments or instability in the nation where the investment was provided |
| 6 | Currency risk | The investment value decreases if the other currency drops against the Canadian |
Questions you must ask before purchasing fixed-income mutual funds
- Does the particular fund ensure regular income? Will it suit your personal goals and the duration you want to invest?
- Does its risk level suit your risk tolerance? (If a fixed income mutual fund’s returns differ a lot from past year, it may provide higher risk since its performance can vary rapidly in either direction)
- What are the costs of the particular fixed-income mutual fund?
- How consistent the fund has been over the long period? How did it perform in various market conditions?
- What’s the education background and experience level do the portfolio manager carry? Were they successful?