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Fixed Income Funds

For the average Indian millennial who has started to peak in his career, having a surplus fund is still farfetched. Salaries are limited and are more or less utilised for personal needs. Plus, given the nature of rising inflation and increasing cost of living, saving has furthermore become difficult in metropolitan cities. With limited savings in hand at the end of every month, choosing the right type of investment can serve better to build wealth opportunities for the future. Just imagine a situation where you get additional money as a surplus to your monthly salary. Yes, it is possible, say hello to the power of fixed income investments.

Fixed income funds are mutual funds which give you returns at fixed intervals - monthly, quarterly or half yearly. This income is determined as per a particular rate and may not be a fixed amount. It heavily depends on the performance of the fund as well. But what are mutual funds in first place? A Mutual Fund aims to pool in money from multiple investors, such as i.e. retail investors, corporate investors, groups, etc. It invests them in baskets of investments. These baskets form what is called a portfolio. This means, your money is invested in a group of investments. (Either stocks or debt instruments) On the basis of where the money is invested, Fixed Income mutual funds are classified as debt funds, exchange traded funds and money market funds.

Elements of Fixed Income Funds

Now that you have a brief idea of what a fixed income fund is, let us move to the next stage and learn more about investing in such instruments.

Debt Fund

Debt fund is a type of fund that invests in fixed return financial instruments like corporate bonds, debentures, certificate of deposits and government securities. They do not invest in the volatile stock market and have more predictable returns, and hence are considered as having low risk. They also include various funds investing in short term, medium term and long term bonds. The four most common types of debt funds include:

  • General Debt Funds: General debt funds invest in different types of debt instruments, both government as well as private with a specific time period. These instruments usually take the form of Bonds, Certificate of Deposits and Debentures.

  • Monthly Income Plans: Also known as MIPs, these are funds that give out regular pay-outs. These payouts can be given out monthly, quarterly, semi-annually or annually. These funds normally invest a significant part of the capital in debt instruments while the remainder amount is invested in equity. This fund should not be confused with a post office monthly scheme as the pay-outs of an MIP can be skipped if the fund is not performing well.

  • Gilt Funds: this fund invests only in long-term government securities, such as government bonds. One important fact about these funds is that their rate of returns are not stable, for an average gilt fund it is 2.5% in 6 months then 16% in a year and maybe 9% in 5 years. Since their returns vary a lot, they are not a primary choice among investors.

  • Liquid funds: These funds invest in short-term debt instruments such as a certificate of deposits, treasury bills, term deposits etc. The maturity period of these instruments lies between 3 months to 6 months.

Exchange Traded Funds (ETFs)

These are index funds, here the index refers to the indices of the stock market, which implies that these funds are traded on the stock market of India (BSE and NSE). As an investor, you can buy as many units as you want without any restriction just like shares in a stock market on a day-to-day basis. One important difference between ETFs and any other type of index funds is that ETFs do not intend to outperform their corresponding index. They simply replicate the performance of the Index. Lately, the Indian government has formulated the Bharat 22 ETF, a fund which houses 22 public sector companies. It tracks the specially made S&P BSE Bharat 22 Index, managed by Asia Index Private Limited. Another important and popular fund of this type is ETF Gold.

Three benefits of ETFs:

  1. They offer a diversified investment portfolio
  2. The stocks in the indices are selected carefully by index providers and are rebalanced periodically
  3. Offers anytime liquidity through the exchanges

Money Market Funds

This fund invests only in money markets such as commercial papers, commercial bills, treasury bills certificate of deposit (CDs) and other instruments specified by RBI. These funds have a minimum lock-in period of 15 days. Until recently, the RBI regulated money market funds but they now come under SEBI. It aims to provide investors with low-risk returns and to invest in easily accessible cash and their equivalent assets.

The prominent feature which makes money markets unique is the high level of liquidity that they offer. It is easy to make money market trades across currencies, maturities, debt structure as well as credit risk, making it ideal for institutions seeking to borrow or invest for short term finance.

Features of Fixed Income Funds

  • Focused on providing a regular fixed income to the fund-holder
  • It can also serve as a regular source of returns for retired persons in addition to their pension and investors with a low risk appetite
  • They are managed by a team of well versed fund managers who revise the portfolio regularly in order to make the fund more adaptable and healthy in response to economic changes
  • Maintain stable returns in spite of market disturbances or changes in economic situations
  • Offer high liquidity by allowing the investor to remove their funds whenever they require money
  • ETFs are more profitable as they are traded in the stock market
  • One can avail the benefit of indexation and reduced tax amount on returns
  • One can get better returns than 4% interest in normal savings bank account and normal bank fixed deposits

How does a Fixed Income Mutual Fund work

  • It focuses on getting more income into the fund on a regular basis through the interest that the fund earns
  • These funds are of the close-ended fund type, they are open for subscription only during their (New Fund Offer) NFO period
  • Have a specified tenure and a fixed maturity date
  • Funds raised are locked within the tenure, enabling efficient management of the corpus
  • Fund managers select those assets which have the best growth potential
  • Fund managers have ample time to create a suitable long-term investment strategy

Top Fixed Income Mutual Funds in India

Aditya Birla Sun Life Medium Term Plan - Retail Plan

This scheme is ranked 4 in Credit Opportunities Funds category by Crisil. (for the quarter ending, Mar 2018) With a Net Asset Value (NAV) of 22.172 as on July 5th 2018, the investment objective of this scheme is to generate regular income and capital appreciation by investing in a portfolio of debt securities with medium term maturity. It has a 3 year return rate of 9.13% and 8.39% for 5 years.

Reliance Credit Risk Fund

With a NAV of 24.374 as on July 5th 2018, the primary investment objective of this option is to generate optimal returns with a moderate level of risk and the investments are made in debt & money market instruments. It has a 3 year return rate of 8.33% and 7.87% for 5 years.

HDFC Short Term Opportunities Fund

This scheme is ranked 1 in Debt Short Term category by Crisil. (for the quarter ending, Mar 2018) With a NAV of 19.387 as on July 5th 2018, the investment objective of this scheme is to generate regular income and capital appreciation. It has a 3 year return rate of 8.14% and 7.58% for 5 years.

ICICI Prudential Savings Fund

With a NAV of 338.015 as on July 5th 2018, this scheme is ranked 3 in Ultra Short Term Debt category by Crisil. (for the quarter ending, Mar 2018) The investment objective is to generate income through investments in a range of debt and money market instruments while maintaining the optimum balance of yield, safety and liquidity. It has a 3 year return rate of 8.51% and 7.87% for 5 years.

Aditya Birla Sun Life Short Term Opportunities Fund

With a NAV of 29.938 as on July 5th 2018, this scheme is ranked 5 in Credit Opportunities Funds category by Crisil. (for the quarter ending, Mar 2018) The investment objective of this scheme is to generate income and capital appreciation by investing 100% of the corpus in a diversified portfolio of debt and money market securities. It has a 3 year return rate of 8.37% and 7.83% for 5 years.

FAQs on Fixed Income Funds

What is a fixed income mutual fund?

Fixed income mutual funds are those mutual funds which give you returns at fixed intervals - monthly, quarterly or half yearly. This income is determined as per a particular rate.

What is an example of a fixed income investment?

A few examples of fixed income investment include debt funds, Exchange Traded Funds (ETFs), etc.

What does a fixed income mean?

Fixed income is an Income that you can derive from a source on a regular basis. (monthly, quarterly, semi-annually or annually)

What is the difference between fixed income and equity?

Equity investments usually consist of stocks that are traded on the stock exchanges whereas Fixed-income. Investments include vehicles like corporate or government bonds or bond mutual funds.

Can you lose money in a bond fund?

Yes, you can lose money in a bond fund if the bond fund declines in value prior to its maturity date, the rate of return is reduced.

Is a bond fixed income?

Yes, bond is a fixed income. They generally pay a return on a fixed schedule, though the amount of the payments can vary.

Why invest in fixed income securities?

Fixed income securities such as corporate bonds, government bonds, preferred company stocks and certificates of deposit (CDs) are more stable than pure equity holdings. Investors tend to rely on this asset class more during times of economic downturn or when steady income is the objective of the investment account.

What are some examples of fixed income securities?

The most common examples of fixed-income securities include Treasury bonds, corporate bonds, certificates of deposit (CDs) and preferred stock.