KNOWLEDGE CENTRE Debt Funds / What Are Fixed Income Funds?

What Are Fixed Income Funds?

Most mutual fund investors assume that mutual funds only invest in the equity market due to the high returns and low risk associated with them. But not many investors are aware of debt instruments or debt mutual funds. Debt funds offer lower returns than equity funds but at a much lower risk to the investor’s money. Hence, there are a good choice if you’re looking to diversify your portfolio.

Fixed income funds are a type of debt fund that invest in municipal bonds, treasury bills, corporate bonds, etc. These funds guarantee generally pay a return on a fixed schedule, although the amount of money can vary. These funds are assigned by reputed companies, banks, and the government, which have a higher probability of giving a reliable source of income to the investors.

How Do Fixed Income Funds Work?

Fixed income funds work on the aim to have money coming into the fund on a regular basis, mostly through interest that the fund earns. Since these funds are of the close-ended fund type, they are open for subscription only during their NFO period. This horizon can vary from three months to up to five years.

What Is The Difference Between Fixed Income Funds And Bond Funds?

The difference between fixed income and bond funds is in the types of debt assets they invest in. Bond funds as their name suggest invest primarily in bonds only, while fixed income funds are free to invest in other types of debt asset classes such as money market funds and commercial papers, as long as the investment guarantees returns at a fixed intervals.

What Are The Taxes On Fixed Income Bond Funds?

Taxes on fixed income funds are similar other debt funds, wherein if you hold the funds for less than a year, then any profits you make are added to your income and taxed according to the tax bracket you fall under. If held for more than a year, then then your profits are charged at 20% before indexation benefits.

What Are The Benefits Of Investing In Fixed Income Funds?

Fixed income plans hold their investments till maturity and ensure that the interest accrued is received. And since no new applications are taken, the fund managers are not forced to invest in lower rated instruments, thus reducing portfolio churns. Also, if a fixed income fund is floated at the peak of a rising rate cycle, it can deliver better returns than open-ended debt funds. An open-ended fund would first see a positive impact as bond prices would benefit from the falling rates. But subsequently, new debt instruments will be added to the fund at lower rates, therefore bringing down the portfolio value. But the fixed income plan would lock in at high rates during the NFO and hold these instruments, thus earning the best yield at the time.

How To Invest In Fixed Income Funds?

You should invest in fixed income funds if you you’re okay with taking slightly higher risks than traditional instruments such as savings account and FDs, but don’t want to invest in volatile investments such as equities. Fixed income funds guarantee payment at a fixed duration which might appeal to you if you’re planning to invest for your retirement pension plan, or even to generate a secondary source of income. But, do keep in mind the risk of credit rank fluctuations while making investments in these funds.

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