What are Fixed Income Funds?
Fixed Income Funds are those mutual funds that invest in high quality fixed income securities like the government debt, treasury bill, money market etc and pay the investors a fixed rate of return as per the payment terms and period (could be either monthly, quarterly or yearly basis),
Types of Fixed Income Funds
#1 – Debt Fund
Debt Fund is a Fund that invests the Investors amount in various financial Instruments which gives the fixed Return. It can be Corporate Bond, Debentures, Government Securities. In this fund, there are very low chances of risk exist because money does not get Invested in Stock Market and investors will get Interest amounts on regular Intervals.
Common types of Debt Fund include:
- Monthly Income Plan: In this, some part of the amount is invested in Debt instrument and some part is invested in Equity. So, by the mixture of Investment in both Instrument, it provides some good return on monthly, quarterly, Half Yearly or yearly basis.
- General Debt Funds: General Debt Funds invest the investor’s amount in different types of debt instruments. It can invest in debt instruments of both Government as well as Private.
#2 – Exchange Traded Funds
Exchange-Traded funds are Index funds and it refers to the Indices of the Stock Market. This fund is a combination of various stock which is traded on the Stock Exchange. This fund is called Exchange Traded fund because it is traded on Stock Exchange like particular security traded. In this fund, a risk exists but slightly lower than the risk if invested in particular share because this fund invests in a basket of Securities.
#3 – Money Market Fund
Money Market funds are those funds that invest only in the money market like commercial paper, treasury bills, and instruments. It is a type of Mutual fund which invests in high quality and Short-term fund. Investment risks are extremely low in Money Market fund and investor will get good returns
The following are the features which are as follows:
- Provide Fixed Income on regular Intervals: These funds provide fixed Income on regular intervals such as monthly, quarterly, yearly after diversification the investors fund and provide a regular source of income to investors.
- Higher Return than Saving Bank Account: These funds provide a higher rate of return on an average in comparison to the Saving Bank Interest rate which is approx. 3.5% to 4%. Although some risk exists in investment in Fixed Income fund it gives more return into consideration.
- Tax Implications: If investors invest in these funds like any mutual fund and such fund provide any dividend income then such income is exempt in the hands of Investor up to a certain amount in a financial year, although the company is paying dividend distribution tax on the distribution of dividend to Investors.
Fixed Income Fund Available in Market (India)
There are top fund that is available in the market Like:
- ICICI Prudential Saving Fund
- Aditya Birla Sun life Short term Opportunities fund
- Aditya Birla Sun life Medium-term Plan
- Reliance Credit Risk fund
- L & T low duration fund
- ICICI Prudential Constant Maturity Gilt
- HDFC Short term Opportunities Fund
- UTI Treasury Advantage Fund
- Diversification of Fund:- If Investor Invest in the Fixed Income Fund then it diversifies the Investors fund in various portfolio and provides fixed Income on regular Intervals.
- Investment after Researching the various Funds:– In these funds, the amount is invested after researching the various fund that in which portfolio amount should be invested so that there will be low risk and more returns
- Change in Portfolio if Required:– Investor can change the portfolio according to their own choice. An investor can sell the longer-duration funds and buy lower-duration funds.
- It provides a low return in comparison to Equity Investments. In Equity Investments lot of risk exists so, it provides a very high return but in fixed income fund very low risk exists in comparison to equity instrument so it provides a low return.
- Some funds are those which focus only on growth and they do not pay to Investor frequently rather they invest their own earnings into the fund so that fund NAV will increase and will give more amount to the investor on the maturity date. In this investor will not get interested or dividend on a monthly, quarterly, half-yearly or yearly basis but they will get maturity amount with more profit on the maturity date. This mechanism is also called wealth creation of the fund.
Fixed Income Fund always takes care of the Investor’s minds that Investors always wants some good returns with low risk. This fund collects investors amount and invests in various types of Securities like a debt instrument, debt & equity Instruments i.e. It diversifies the Investor fund in various securities so that chances of risk should be mitigated and provide some handsome return to the Investor. These funds also give an opportunity to investors that he can shuffle the funds according to their own choice although shuffling of funds incurs some cost but still, an investor has some good right that he can choose some good securities and get more return in consideration.
This has been a guide to Fixed Income Funds and its 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 –