Fixed Income Mutual Funds

Gaurav Chakraborty
Gaurav Chakraborty
fixed income

Fixed income Mutual Funds offer returns to investors at pre-determined intervals. The frequency of such return payout could be monthly, quarterly or bi-annually. The amount paid at each interval is not fixed and depends on a host of factors.

Salient features of Fixed Income Mutual Funds:

  • The main objective of these mutual funds is to provide a regular stream of earnings to the investor. This makes it a preferred choice for individuals who are retired or who have a low risk appetite.
  • These funds are for a specified tenure and have a fixed maturity timeline.
  • They are highly liquid in nature. This feature makes it a perfect choice for individuals who want to create an emergency fund as they can withdraw it immediately in times of crisis.
  • These are actively managed funds. A dedicated team of fund managers monitor the performance on a regular basis and re-align the portfolio basis the economic fluctuations. The main aim is to ensure stable returns despite market volatility.
  • Fixed Income Mutual Funds are close-ended in nature and remain unavailable for subscription on an ongoing basis. The Fund House announces a New Fund Offer (NFO) for a particular time duration. Investors can subscribe only during this period.
  • They offer the benefit of double indexation. The capital gain from these funds is adjusted for inflation at two points – first time in the year of making the investment and second time in the maturity year.
  • Short-term capital gains from such funds are added to the investor’s income and income tax is calculated basis the applicable tax slabs. In case of long term capital gains, 10% tax is applicable (without indexation). In case of indexation, the long term capital gains tax rate is 20%.


Key elements of Fixed Income Mutual Funds:

  • Debt Fund

Debt Funds are funds that invest majorly in debt based or fixed-income securities such as Treasury Bills, Gilt Funds, corporate bonds, certificate of deposits, debentures, etc. As these funds avoid the stock market volatility, they offer stable returns and have low-risk profile.

Usually Debt Funds have a pre-determined maturity date. Investors earn through two sources in these funds – interest and appreciation in capital as a result of market dynamics.

  • Exchange Traded Funds (ETFs)

ETFs are index based funds. They were launched in India in the year 2001. They comprise of a portfolio of stocks which is similar to the composition of market indices such as BSE Sensex, CNX Nifty, etc. A striking feature of ETFs is that unlike other index funds, they do not aim at outperforming the benchmark or index. Instead they replicate the corresponding index’s performance. The trading value of the ETF is dependent on the Net Asset Value of its underlying stock. ETFs are highly liquid in nature.

  • Money Market Funds

These funds invest solely in money market instruments such as Treasury Bills (T-Bills), Commercial Paper and bills, Certificate of Deposit (CDs) and other such instruments. The USP of these funds is their high level of liquidity. They have a minimum lock-in period of 15 days. While earlier they were regulated by RBI, with the change in guidelines, money market funds now fall under the ambit of SEBI.

Amongst these three elements of fixed income mutual funds, debt funds are considered better from a long-term perspective.  Exchange Traded Funds(ETFs) are relatively more profitable since they are traded on the stock exchange.


Are Fixed Income Mutual Funds and Fixed Deposits (FDs) same?

There are many similarities between these two instruments. Both of them have a pre-determined tenure or maturity period. Both these options offer the benefit of varying maturity. investors have the flexibility to choose a maturity period basis their needs and convenience.

However, they differ in their returns. In case of Fixed Deposits, investors are assured of a particular yield percentage. However, with Fixed Income Mutual Funds, investors are only assured of a regular return. The yield percentage is only indicative in nature and can vary depending on the fund’s performance. Also, in case of Fixed Deposits, the interest earned is included with the overall income and taxed accordingly. However, in Fixed Income MFs the tax is calculated as a short term capital gain or long term capital gain, as applicable.


Who should invest in Fixed Income Mutual Funds:

These funds focus on ensuring a regular stream of income for the investors rather than capital appreciation or growth. Also, their inherent risk profile is low. Hence, they are suitable for investors who are risk averse or looking for a steady source of income (even if the returns are low).

Fixed Income Mutual Funds also serve as a great diversification tool. Some investors invest in these funds to stabilize their overall portfolio. It helps them balance their portfolio and ensure that all their money is not at risk in times of volatility.

Gaurav Chakraborty
Gaurav Chakraborty

Gaurav is an engineer-turned-digital marketeer. Also a personal finance blogger with experience in financial planning and crowdfunding sector. He is a part of the Marketing team at Orowealth.

1 Comment
  • Avatar
    Michael Dunkley
    Posted at 07:43h, 28 August Reply

    Amazing post!
    Thanks for sharing this post.

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