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 a fixed return. It can be Corporate BondCorporate 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., Debentures, Government Securities. In this fund, there are very low chances of risk exist 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., and investors will get Interest amounts at regular intervals.
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., and some part is invested in Equity. So, by the mixture of Investment in both Instrument, it provides some good returns on a 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 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. 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 a specific share because this fund invests in a basket of Securities.
#3 – Money Market Fund
Money MarketMoney MarketThe money market is a market where institutions and traders trade short-term and open-ended funds. It enables borrowers to readily meet finance requirements through any financial asset that can be readily converted into money, providing an organization with a high level of liquidity and transferability. funds are those funds that 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., treasury billsTreasury BillsTreasury Bills or a T-Bill controls temporary liquidity fluctuations. The Central Bank is responsible for issuing the same on behalf of the government. It is given at its redemption price and a discounted rate and is repaid when it reaches maturity., and instruments. It is a type of Mutual fundMutual FundA mutual fund is an investment fund that investors professionally manage by pooling money from multiple investors to initiate investment in securities individually held to provide greater diversification, long term gains and lower level of risks. which invests in high quality and Short-term fund. Investment risks are extremely low in the Money Market Fund, and investors will get good returns.
Following are the features:
- 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 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. funds, 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 is a 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 the various portfolio and provides fixed income at regular intervals.
- Investment after Researching the various Funds:– In these funds, the amount is invested after researching the different 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. 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. lot of risk exists, it gives a very high return, but in a fixed-income fund, the very low risk exists compared to equity instrument, so it provides a short recovery.
- Some funds are those who focus only on growth, and they do not pay to Investors frequently; instead, they invest their earnings into the fund so that fund 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. will increase and will give more amount to the Investor on the maturity date. This Investor will not get interested 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 Fund always takes care of the Investor’s minds that Investors still 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 different securities so that chances of risk should be mitigated and provide some handsome return to the Investor. These funds also allow investors that he can shuffle the funds according to their own choice. However, the mixing of funds incurs some cost, but still, an investor has some good right to choose some suitable 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 –