Mutual Funds
Fixed Income Mutual Funds in India
Fixed income mutual funds are one of the investments that provide consistent returns without having to invest into high-risk options. As we all know that the inflation rate is rising, individuals are seeking consistent return of their investment and these are designed to provide stable returns and preserve capital, making them an ideal investment for conservative investors. In this article, we will share about these funds and on that basis, you can decide if you want to invest in these funds.
What are Fixed Income Mutual Funds?
A fixed income mutual fund is an investment option that mainly invests in assets such as government securities, corporate bonds, debentures, and other money market instruments. These funds promise to generate income for investors through regular interest payments from these underlying securities in their portfolio. Fixed Income mutual funds are also known as debt funds.
Types of Fixed Income Funds
Here is a list consisting of the key types of fixed income mutual funds or debt funds:
1. Long Term Debt Funds
These funds invest in government securities and papers with maturities that are longer than 5 years or 10 years. Such funds are usually impacted by interest changes over time. So, if rates go high, they face greater capital depreciation and if rates go low, they face greater capital appreciation.
2. Short Term Debt Funds
These funds invest in short-term investment instruments such as shorter tenure G-Secs, short-term corporate papers, and money market instruments like treasury bills, Commercial Paper (CP), certificates of deposits (CDs), etc. The Net Asset Value (NAV) of short-term debt funds is less vulnerable to interest rate changes.
3. Credit Opportunities Fund
These funds take a slightly higher degree of credit risk. Credit Opportunity Fund adds bonds that are AA rated — as they offer a higher yield. However, the bond you select plays a crucial role because lower the rating it has, higher its risk.
4. Floating Rate Debt Fund — Short Term
There are two types of bonds in this fund — fixed rate bonds and floating rate bonds. Fixed rate bonds offer a fixed rate of interest. Meanwhile, floating rate bonds pay interests that move with a benchmark like the MCLR or the Bank rate. These funds invest in floating rate funds with a shorter maturity.
5. Floating Rate Debt Fund — Long Term
These funds are just an extension of the floating rate funds, but for a longer period of time. They invest in those floating rate instruments with a longer maturity period. When rates rise, these funds gain money and when rates fall low, these funds lose money.
6. Ultra-Short Term Funds
These funds are also known as liquid-plus funds. Ultra-Short term funds add a bit of long term paper to enhance the returns on the funds as compared to pure liquid funds. Quite popular among institutional investors, these funds have an exit load.
7. Short Term Gilt Funds
Gilt funds are government bonds, especially of the central government of India. These funds invest purely in gilt instruments with a maturity period of less than a year. To yield higher returns, some gilt funds may also invest in select state government bonds.
8. Long Term Gilt Funds
These funds also invest in gilt instruments such as government bonds, but for a longer maturity period. Such funds also face interest rate changes over time.
9. MIP Aggressive Funds
MIPs or monthly income plans have a higher exposure of debt and a lower proportion of equities. In an Aggressive MIP, equities have a proportion as high as 25-30%. While the debt component gives stability, the equity portion gives capital growth.
10. MIP Conservative Funds
Like any MIP, this also works on the basis of debt/equity mix, with a predominance of debt as compared to equity. However, MIP Conservative funds restrict the equity exposure to only 5-10%. Here, equity is used to get slightly higher returns rather than to create long-term wealth creation.
How Do Fixed Income Mutual Funds Work?
Fixed income mutual funds work to consistently boost the fund’s income through the interest earned on its holdings. Typical close-ended funds are open for subscription only during the New Fund Offer (NFO) period and come with a specified investment tenure. The funds raised remain locked during the tenure. These funds require fund managers to look over them and create a long-term investment strategy.
Features and Benefits of Fixed Income Mutual Funds
Here are all the features and benefits that you can avail by investing in fixed income mutual funds:
Low Risk
Fixed income mutual funds are less riskier than equity funds, which are highly dependent on market changes. Thus, investing in these funds allows you to diversify your investment portfolio, reducing overall risk.
Stable Returns
With careful analysis, you can meet your long-term financial goals with fixed income mutual funds in India. It’s because these funds provide stable returns as compared to equity funds.
Flexibility
Investing in these funds means you aren’t bound to just one investment. You can switch between different funds. Unlike FDs, you can make both lumpsum investments and periodic transfers into other funds to manage the risk.
Tax Advantages
You have to pay taxes only when you redeem your funds. However, there are two types of taxes based on your investment period. If you invest for less than 3 years, you have to pay Short-Term Capital Gains (STCG) tax, and if you invest for more than 3 years, you pay Long-Term Capital Gains (LTCG) tax.
No Lock-In Period
These funds have no lock-in period and so, you can withdraw your funds anytime you want. However, you have to pay for exit load and other expenses.
Why You Should Invest In Fixed Income Mutual Funds
Fixed income mutual funds are a great asset to invest in. Here are all the reasons why you should consider fixed income mutual funds:
Liquidity
Open-ended fixed income funds allow you to liquify your funds for urgent financial requirements.
Diversification
These funds can help you diversify your portfolio as they invest in various fixed-income securities such as government securities and corporate bonds. Thus, they reduce the overall risk.
Lower Risks
Although debt funds aren’t completely risk-free, they have a degree of low to medium risks.
Additional Income
Through Systematic Withdrawal Plans (SWPs), fixed income plans may provide an extra source of cash flow, helping you gain more financial stability.
Retirement Planning
These funds have a low risk and so, they can be a great retirement planning instrument. It can also work as a low return income stream after retirement.
Factors to Consider Before Investing In Fixed Income Mutual Funds
Before investing in fixed income mutual funds, here are all the factors that you should consider:
Financial Goals
Choose your financial objective to invest in fixed income mutual funds — whether you want to earn additional income or higher returns than a savings account.
Past Performance
Analyze your chosen mutual fund’s track record in the past 5-10 years to determine its returns and consistency. Have a glance at the fund’s past returns as compared to benchmark.
Investment Duration
Consider the investment tenure for which you want to make the investment. The maturity period can range from days to years and so, consider your timeline and return expectations wisely.
Risks
Despite the stable returns, fixed income mutual funds still have some risks like interest rate, credit, and liquidity risk. So, make yourself aware of these risks from investing.
Costs
Check the expense ratio of the fund before finalizing on it. A lower expense rate indicates more returns in your bank account.
How to Choose Best Fixed Income Mutual Funds?
To choose the fixed income mutual funds to invest in, you can use a technique called “fixed-income analysis”. This method can help you understand which funds fulfill your return expectations and risk tolerance.
You should start this method with the risk factor. Here’s why: every investment has a correlation between its risk level and returns. Consequently, fixed income analysis may not only help an investor evaluate their risk tolerance but also understand whether the risks align with the expected returns.
Debt Funds VS Bank FDs
Fixed Deposits (FDs) are considered as the safest investment method in India. But what makes them different from debt funds?
Starting with FDs — they are purely dependent on the interest rates fixed by the banks from time to time. The interest rate you get on an FD depends on the bank. Meanwhile, debt funds invest in government securities with an element of active management in debt funds. Thus, debt funds tend to earn 2-3% more than bank FDs.
Debt funds also benefit from the interest earned on their debt investments. When interest rates fall, the fund sees capital appreciation. This dual benefit of debt funds results in them outperforming bank FDs.
Fixed Income Mutual Funds VS Equity Mutual Funds
Equity mutual funds, as the name suggests, invest majorly in stocks (almost 65%). These funds aim to provide the investors with long-term capital appreciation by investing in companies that have a potential to grow. They offer higher returns than fixed income mutual funds, but also carry high risks.
On the other hand, fixed income mutual funds invest in government securities and corporate bonds. They aim to provide investors with a stable regular income and preserve capital. Although debt funds don’t offer returns as high as equity funds, they are less riskier than equity mutual funds.
Conclusion
Fixed income mutual funds, or debt funds, are a crucial component of a diversified investment portfolio, providing stability, regular income, and relatively lower risk compared to equity investments. By understanding the different types of debt funds and their respective risk-return profiles, investors can make informed decisions to align their investments with their financial goals and risk tolerance. Whether you are looking for short-term liquidity or long-term capital appreciation, there is likely a fixed income mutual fund in India that can meet your needs.
FAQs
1. How to earn fixed monthly income from mutual funds?
You can earn a fixed monthly income from mutual funds through an SWP (Systematic Withdrawal Plan) that allows you to withdraw a fixed amount from your investments on a periodic basis.
2. Do fixed income mutual funds have risks?
Yes, fixed income mutual funds with an investment tenure of longer than 3 years may be affected by interest rate changes. These funds have risks associated with inflation, liquidity and credit risks which may impact the investments.
3. How do fixed income mutual funds distribute returns?
Fixed income mutual funds distribute returns as dividends. The interest earned from the fund’s assets is then distributed to the investors on a regular basis.
4. Which is the best fixed income mutual fund?
Debt mutual funds are the best source for a fixed income as they have low risks and provide good enough returns.