What are Fixed Income Funds?

Types of Fixed Income Funds

#1 – Debt Fund

Debt fundDebt FundDebt fund are investments, such as a mutual fund, closed-end fund, ETF, or unit investment trust (UTI), that primarily invest in fixed-income instruments like bonds or other types of a debt security for returns.read more is a fund that invests the investor’s amount in various financial instruments, which gives a fixed return. For example, it can be corporate bondsCorporate BondCorporate Bonds are fixed-income securities issued by companies that promise periodic fixed payments. These fixed payments are broken down into two parts: the coupon and the notional or face value.read more, DebenturesDebenturesDebentures refer to long-term debt instruments issued by a government or corporation to meet its financial requirements. In return, investors are compensated with an interest income for being a creditor to the issuer.read more, and government securities. This fund has a meager risk because money does not get invested in the Stock MarketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price.read more, and investors receive interest amounts at regular intervals.

Key Takeaways

  • Fixed income funds are like mutual funds that invest in strongly backed securities, such as government bonds, T-bills, money markets, etc., and pay the investor a regular, stable return. There are three fixed-income funds types: debt funds, exchange-traded funds (ETFs), and money market funds. Debt funds provide fixed returns, exchange-traded funds refer to the stock market indices, and money market funds are invested only in the money market, like commercial papers, treasury bills, and other cash equivalent securities. Some perks of investing in fixed income securities are Regular fixed income, Higher returns, and Tax implications.

Common types of debt funds include:

  • Monthly Income Plan: In this, some part of the amount is invested in a Debt instrumentDebt InstrumentDebt instruments provide finance for the company’s growth, investments, and future planning and agree to repay the same within the stipulated time. Long-term instruments include debentures, bonds, GDRs from foreign investors. Short-term instruments include working capital loans, short-term loans.read more, and some is invested in equity. So, the mixture of investment in both instruments provide good returns monthly, quarterly, half-yearly, or yearly.General Debt Funds: General debt fund is a fund that invests the amount in different debt instruments. It can be invested in debt instruments of both government and private organizations.

#2 – Exchange Traded Funds

Exchange-Traded fundsExchange-Traded FundsAn exchange-traded fund (ETF) is a security that contains many types of securities such as bonds, stocks, commodities, and so on, and that trades on the exchange like a stock, with the price fluctuating many times throughout the day when the exchange-traded fund is bought and sold on the exchange.read more are index funds that refer to the indices of the stock market. This fund is a combination of various stocks traded on the stock exchange. It is called an exchange traded fund because it is traded on the stock exchange. In this fund, the risk is slightly lower than the risk if invested in a specific share because this fund invests in a basket of securities.

#3 – Money Market Fund

Money MarketMoney MarketThe money market is a financial market wherein short-term assets and open-ended funds are traded between institutions and traders.read more funds invest only in the money market like commercial paperCommercial PaperCommercial Paper is a money market instrument that is used to obtain short-term funding and is often issued by investment-grade banks and corporations in the form of a promissory note.read more, treasury billsTreasury BillsTreasury Bills (T-Bills) are investment vehicles that allow investors to lend money to the government.read more, and other cash equivalent securities. It is a type of Mutual fundMutual FundA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etcread more which invests in high-quality, short-term funds. Therefore, money market fund investment risks are extremely low, and investors receive good returns.

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Features

Following are the characteristics of fixed income funds:

  • Provide Fixed Income at Regular Intervals: These funds provide fixed income at regular intervals, such as monthly, quarterly, yearly, after diversification of the investors’ fund and supply a steady source of income to investors.Higher Return than Saving Bank Account: These funds provide a higher return rate on average than the saving bank interest rate, which is approximately 3.5% to 4%. Although some risk exists in investment in Fixed IncomeInvestment In Fixed IncomeFixed income investment is a type of investment in which the investor receives a fixed and relatively stable stream of income in the form of dividends or interest over a period of time. Companies and governments typically issue fixed investments in the form of debt securities.read more funds, it gives more returns.Tax Implications: If investors invest in these funds like any mutual fund and such fund provides any dividend income, such income is  is exempt Is ExemptExempt income refers to certain sources of income earned by an individual that are not taxed under the revenue laws of the country or the state laws, and thus do not form part of the total taxable income.read more in the investors’ hands up to a certain amount in a financial year. However, the company pays dividend distribution tax on the dividend distribution to investors.

Fixed Income Fund Available in Market (India)

There are top funds available in the market like:-

  • ICICI Prudential Savings FundAditya Birla Sun Life Short Term Opportunities FundAditya Birla Sun Life Medium-Term PlanReliance Credit Risk fundL & T Low Duration FundICICI Prudential Constant Maturity GiltHDFC Short Term Opportunities FundUTI Treasury Advantage Fund

Advantages

  • Diversification of fund:- If an investor invests in the fixed income fund, it diversifies the investors’ fund in various portfolios and provides fixed income at regular intervals.Investment after researching various funds:– In these funds, the amount is invested after researching different funds in which portfolio amount should be invested so that there will be low risk and more returns.Change in the portfolio if required:– Investors can change the portfolio according to their own choice. An investor can sell the longer-duration funds and buy lower-duration funds.

Disadvantages

  • It provides a low return in comparison to equity investments. Since Equity InvestmentsEquity InvestmentsEquity investment is the amount pooled in by the investors in the shares of the companies listed on the stock exchange for trading. The shareholders make gain from such holdings in the form of returns or increase in stock value.read more hold a lot of risk, it gives a very high return. However, a low risk exists in a fixed-income fund compared to an equity instrument, providing a short recovery.Some funds focus only on growth, and they do not pay to investors frequently. Instead, they invest their earnings into the fund so that their fund’s net asset value (NAVNAVNet Asset Value is calculated by subtracting the total value of the entity’s liabilities from the total value of its assets and dividing the result by the total number of outstanding shares.read more) increases and gives more money to the investor on the maturity date. Thus, the investor will not get interest or dividend on a monthly, quarterly, half-yearly, or yearly basis, but they will reach maturity with more profit on the maturity date. This mechanism is also called “wealth creation of the fund.”

Conclusion

Fixed income funds are always mindful of the investor’s desire for high returns with low risk. This fund collects investors’ amounts and invests in various types of securities like debt instrument, debt & equity instruments, i.e. It diversifies the investor’s fund in a variety of securities in order to mitigate risk and provide handsome returns to the investor. Investors can also shuffle the funds according to their preferences. Although the expense of mixing funds is incurred, an investor still has the right to select suitable securities and receive a higher return.

This has been a guide to Fixed Income Funds and their definition. Here we discuss types, features, and how fixed-income funds work along with advantages and disadvantages. You may learn more about Financing from the following articles –

Government fixed-income assets are regarded as safe investments in uncertain economic times. The U.S. Treasury backs them. On the other hand, the company’s ability to make money supports corporate bonds. In essence, corporate bonds carry a greater default risk than government obligations.

The fixed income investment strategy aims to preserve capital and income. Therefore, investments, including corporate and government bonds, certificates of deposit, and money market funds, are frequently included. Fixed income can provide a consistent income source with lower risk than stocks.

Debt mutual fund schemes known as “Corporate Bond Funds” invest at least 80% of their assets in highly rated corporate bonds with a high safety level. These funds invest largely in non-convertible debentures or corporate bonds with ratings of AA+ and above.

  • Bond FundQuant FundsIndex FundsTrust Fund