Fixed Income Funds

Updated on May 6, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Are Fixed Income Funds?

Fixed income funds are mutual funds that invest in high quality fixed income securities like government debts, treasury bills, money markets, etc. and pay the investors a fixed rate of return as per the payment terms and period. The payment schedule could be either monthly, quarterly or yearly basis based on the initial terms of agreement.

Fixed Income Funds

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These kinds of funds are very useful for investors who are looking for a stable and regular return. Usually, investors who wish to invest on a medium to long-term basis go for such funds. The main aim to reduce risk and cater to a wide range of investor needs and generate wealth.

Key Takeaways

  • Fixed income funds are mutual funds that invest in high-quality fixed income assets such as government loans, treasury bills, and money markets. 
  • They offer investors a fixed rate of return based on the payment terms and duration, which can be monthly, quarterly, or yearly.
  • Investors in fixed income funds can benefit from tax exemptions on dividend income up to a specified amount per fiscal year, similar to other mutual funds. However, the corporation managing the fund is responsible for paying dividend distribution tax on the dividend payouts to investors.

Fixed Income Funds Explained

Fixed income funds are mutual funds that invest on behalf of their clients in instruments such as bonds, treasury bills or other instruments in the money market that provide fixed returns.

Top 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 & equty 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.

Thus, the returns on this type of investment option are known beforehand and do not change. Unlike equity, the return will totally depend on the market condition. A massive benefit for fixed-income investors is that if the company issuing the funds goes bankrupt or shuts down operations, they are paid their dues before the equity holders.

Best fixed income funds help corporate houses and the government raise a large amount of money to run their daily operations and meet financial needs. However, at maturity, investors get fixed income funds returns and return the initially invested amount or the principal.

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Mutual fund companies curate different funds for clients with different interest, time frames, and risk appetites. Let us understand the different types of global fixed income funds which will help understand the concept in depth.

#1 – Debt Fund

Debt fund is a fund that invests the investor’s amount in various financial instruments, which gives a fixed return. For example, it can be corporate bonds, Debentures, and government securities. This fund has a meager risk because money does not get invested in the Stock Market, and investors receive interest amounts at regular intervals.

Common types of debt funds include:

  1. Monthly Income Plan: In this, some part of the amount is invested in a Debt instrument, and some is invested in equity. So, the mixture of investment in both instruments provide good returns monthly, quarterly, half-yearly, or yearly.
  2. 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 funds 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 Market funds invest only in the money market like commercial paper, treasury bills, and other cash equivalent securities. It is a type of Mutual fund which invests in high-quality, short-term funds. Therefore, money market fund investment risks are extremely low, and investors receive good returns.

Fixed Income Funds Types

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Top fixed income funds have various ranges of funds for their clients. However, common traits of these funds are the deciding factors to feature in this list. Let us understand the features through the discussion below.

  • 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: On average, these fixed income funds returns are higher than the saving bank interest rate, which is approximately 3.5% to 4%. Although some risk exists in investment in Fixed Income 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 exempt 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 who are investing in fixed income funds.


Let us understand the concept of global fixed income funds with the help of a couple of examples.

Example #1

Eric a retired marine veteran wanted to invest his pension and his modest savings into schemes or funds that gave him fixed returns and the risk involved in the process to be minimal.

Upon conversing with one of his neighbours, who was a financial advisor, suggested to invest into a couple of top fixed income funds. As a result, his money was invested systematically into funds that invested into treasury bills and bonds.

With virtually no risk of losing money, Eric began receiving fixed income from his investments and was stress-free because of the nature of the investment.

Example #2

Top Five Fixed Income Funds (US)

Some of the top such funds available in the US market are as follows –

  • Wisdom Tree Floating rate Treasury Fund
  • Vanguard Emerging Markets Government Bond ETF 
  • Vanguard Federal Money Market Fund
  • iShares 1-3 Year Treasury Bond ETF
  • Vanguard Intermediate-Term Investment-Grade Fund Admiral Shares 

Source – https://money.usnews.com/investing/funds/articles/best-fixed-income-funds-to-buy


Apart from being one of the safest forms of investments, there are a significant number of advantages of investing in global fixed income funds. Let us understand them through the discussion below.

  • 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.
  • Stable income – Fixed income funds returns
  • provide a stable level of capital appreciation after certain years. Debt funds , that include debentures and bonds, pay a fixed interest.
  • Low Risk – Since the returnsa re not directly linked to the equity markets, the risk and volatility is very low.
  • Liquid – The liquidity factor is present in investing in fixed income funds because the funds can be redeemed at any time and the redemption amount is deposited in the investor’s bank account in T+3 days.


Despite the various advantages as discussed above, there are a few disadvantages of investing in such income funds which must be discussed to fully understand the concept.

  • It provides a low return in comparison to equity investments. Since Equity Investments 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 (NAV) 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.”

Fixed Income Funds Vs Money Market Funds

The above are two different types of investment opportunities. But they have some differences. Let us understand the differences between them.

  • The former refers to investments that provide fixed-income funds returns to the investor for a particular period, but the latter relates to short-term borrowing and lending.
  • The liquidity of the former is less compared to the latter.
  • The value of the former fluctuate depending on factors like interest rates, credit quality, etc but the value of the latter is relatively stable.
  • The former is for long term investments and the latter is for short term investments.
  • The former offers to fund long term projects of local and state governments but the latter offers to manage short term capital needs and serves as a temporary opportunity to keep the money and earn return.

Thus, the above points highlight the differences between them and the choice between the two depends on the financial goals, time horizon and the level of risk tolerance of the investor.

Frequently Asked Questions (FAQs)

1. Are fixed income funds secure?

Government fixed-income securities, such as U.S. Treasury bonds, are considered secure investments as the government backs them. However, corporate bonds carry a higher risk of default depending on the financial stability of the issuing company.

2. Do all mutual funds provide fixed income? 

Not all mutual funds provide fixed income. Debt mutual funds specifically invest in debt and money market instruments like commercial papers, debentures, T-bills, and government securities. These instruments generate interest income for investors and return the principal upon maturity.

3. What are the risks associated with fixed income funds? 

Fixed income funds are exposed to various risks due to market volatility. These risks include interest rate risk, reinvestment risk, call/prepayment risk, credit risk, inflation risk, liquidity risk, exchange rate risk, volatility risk, political risk, event risk, and sector risk. Investors should carefully assess and understand these risks before investing.

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