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    Fixed Income Mutual Funds: Things to Know before Investing

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    Want to Invest in Fixed Income Mutual Funds? Here’s What You Should Know Before Investing

    Dec 06, 2022
    5 min | Views 3452

    Summary

    Fixed-income mutual funds invest in avenues that deliver potentially low-risk returns. However, the returns are not fixed and depend on fund performance. Check out this post to learn more about fixed-income mutual funds.

    Content

    Due to the rising cost of living, the investment objective of many people is to generate regular returns from their investments. So, with their potentially higher volatility, options like equity do not fit their investment needs. A better option in this scenario can be a fixed-income mutual fund.

    But what are these fixed income funds? How do they work? Let’s try to understand them in detail-

    What is a Fixed Income Fund?

    Fixed-income funds, broadly known as debt funds, mostly invest in fixed-income securities such as G-Secs (Government Securities), corporate bonds, debentures, and other money-market instruments. As a result, compared to equity funds, fixed-income or debt funds have potentially lower investment risks.

    In India, SEBI has classified debt funds into 16 different categories. So, investors can access 16 different types of debt mutual funds for their investments. While these various debt fund categories have different investment objectives, they follow a more conservative investment approach to try and deliver stable returns to the investors.

    Also Read - What is Debt Fund?

    What are the Different Types of Fixed Income ?

    Here are the 16 types of fixed income or debt funds you can choose for your investments-

    Sr. No

    Fund Type

    Portfolio Composition

    1.

    Overnight Funds

    Overnight securities with maturity of 1 day

    2.

    Liquid Funds

    Money market and debt securities with maturity of up to 91 days

    3.

    Ultra Short Duration Funds

    Debt and money market instruments with Macaulay duration of 3-6 months

    4.

    Low Duration Funds

    Debt and money market securities with Macaulay duration of 6-12 months

    5.

    Money Market Funds

    Money market instruments with maturity of up o 1 year

    6.

    Short Duration Funds

    Debt and money market securities with Macaulay duration of 1-3 years

    7.

    Medium Duration Funds

    Debt and money market securities with Macaulay duration of 3-4 years

    8.

    Medium to Long Duration Funds

    Debt and money market securities with Macaulay duration of 4-7 years

    9.

    Long Duration Funds

    Debt and money market securities with Macaulay duration of more than 7 years

    10.

    Dynamic Funds

    Instruments across durations

    11.

    Corporate Bond Funds

    Minimum 80% investment AA+ and above rated corporate bonds

    12.

    Credit Risk Funds

    Minimum 65% investment in AA or below rated corporate bonds

    13.

    Banking and PSU Funds

    Minimum 80% investment in debt instruments of banks, Public Financial Institutions, Public Sector Undertakings, and Municipal Bonds

    14.

    GILT Funds

    Minimum 80% investment in government securities across maturities

    15.

    GILT Funds (10-Year Constant Duration)

    Minimum 80% in government securities so that Macaulay duration of the portfolio is 10 years

    16.

    Floater Funds

    Minimum 65% investments in floating rate instruments

    What are the Features of Fixed Income Funds?

    Here are some of the highlights of fixed income mutual funds-

    • Potentially Stable Returns

      As these funds invest in debt-based instruments and other fixed-income securities, they could generate potentially stable returns.

    • Various Schemes to Choose From

      As seen above, there are 16 different types of debt schemes with maturities ranging from 1 day to several years.

    Why Invest in Fixed Income Funds?

    Some of the reasons to invest in the best fixed income mutual funds are as follows-

    • Liquidity

      As debt funds are generally open-ended schemes, investors can enter and exit the scheme as required according to their investment goals.

      Also Read - What are Open-Ended Schemes?

    • Diversification

      Adding fixed-income funds to your equity-based portfolio can be an excellent way to diversify your investment across asset categories.

    • Systematic Investment Options

      With fixed-income funds, you also get access to investment options such as SIPs (Systematic Investment Plans), STPs (Systematic Transfer Plans), and SWPs (Systematic Withdrawal Plans).

    What are the Risks Associated with Fixed Income Funds?

    Like other types of mutual funds, fixed-income schemes are not risk-free. Here are some of the risks you should know about-

    • Interest Rate Risks

      In a rising interest rate scenario, bond rates can fall behind and lose their value in secondary markets.

    • Default Risks

      Many fixed-income schemes lend money to corporate entities that pay interest on the borrowed amount. In some cases, the borrower could default on their payments.

    • Inflation Risks

      Higher inflation is also an ever-present risk for fixed-income schemes as it reduces the post-inflation returns.

      Must Read - How to Invest in Mutual Funds?

    How to Invest in Fixed Income Funds?

    You can invest in the best fixed income funds online or offline. For online investment, you can visit AMC’s website, choose the preferred scheme, and complete online KYC to start investing. However, if you’d like to invest offline, ensure you invest through an AMFI-registered mutual fund distributor/agent.

    But as there are various types of fixed-income schemes to choose from, investors are advised to consult a professional advisor before investing.

    Stability and Flexibility with Fixed Income Mutual Funds

    Fixed-income schemes can be ideal for conservative investors looking for more stable returns or an additional source of income.

    However, as these schemes are not risk-free and the returns are not guaranteed, investors should thoroughly understand the type of debt scheme they’ve selected, including its risk profile, before investing.

    Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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