What are Fixed Income Mutual Funds?

Fixed income mutual funds are debt funds that invest in securities like G-Secs, corporate bonds, and other money market instruments that offer fixed interest payments. They typically carry lower market risk than equity funds and offer interest earnings from the underlying bonds and assets. This may make them more suitable for conservative investors and those looking to potentially balance the risk of equities in their portfolio.

For anyone looking to diversify their mutual fund investments beyond equities or seeking relatively lower volatility, fixed income mutual funds are a category worth exploring. These funds invest in fixed-income debt and money market securities which tend to be less volatile than equities.

But if you’re a beginner who’s unsure about what fixed income mutual funds means, their features and benefits, read this guide to understand this category better. 

Fixed income mutual funds are mutual fund schemes that pool money from investors and invest in fixed-income securities like government securities, corporate bonds, debentures, and money market instruments. They are commonly known as ‘debt funds’. 

Fixed income mutual fund performance mainly depends on two ways:

• Interest income: The fund earns interest from investment in the debt securities held in its portfolio.
• Price movements: The value of these securities can rise or fall due to changes in interest rates and market conditions, leading to capital gains or losses.

Some Common Types of Fixed Income Mutual Funds

As mentioned earlier, fixed income mutual funds are debt funds. This means, this category includes all 17 types of debt funds outlined by SEBI in the debt fund category. Some of them include:

Here are some key features of fixed income mutual funds in India:

• Invest in Fixed-Income Securities (debt & money market instruments)

The underlying assets of the fund are fixed-income securities (debt & money market instruments) like G-secs, corporate bonds, debentures, T-bills, etc. This is the defining feature of all fixed income mutual funds. 

• Relatively Less Volatile than Equity Funds

Unlike stocks, fixed-income securities generally have a lower volatility. This could mean less impact of market fluctuations on the portfolio. However, this doesn’t mean fixed income mutual funds are risk-free or that returns are guaranteed.

• Managed by Professionals

Like all MF schemes, fixed income mutual funds are also managed by expert fund managers. They select assets for investment, monitor the portfolio, and adapt strategies in-line with the objectives of the fund.

Now, why do investors consider investing in fixed income mutual fund? Here are some reasons why these funds remain popular:

• Potentially Stable Returns than Equity Funds

Fixed income mutual funds earn returns through regular interest payments from the underlying fixed-income assets. This makes returns potentially more stable than other types of mutual fund categories, like equities. 

• Relatively Less Risky Than Equities

Fixed income mutual funds generally invest in debt instruments, which experience lower price volatility than equities. As a result, they may be suitable for investors seeking relatively stable returns with lower market fluctuations. 

• Better Investment Flexibility 

Fixed income funds allow you to invest in a way that suits your budget. You can choose to invest through monthly/quarterly SIPs or park a lump-sum amount. This gives investors better flexibility than traditional savings options like FDs, where you need a large lump-sum to get started. 

• No Lock-In Period & Easy Liquidity 

These funds typically don’t have a lock-in period. This means you can withdraw your investment at any time. However, exit loads may apply as per the scheme’s exit load structure. 

Before you consider fixed income mutual funds, consider the following aspects:

1. Your Investment Goals

Think about why you're investing. Whether you're looking for regular income, or portfolio diversification, choose a fund that matches your investment objectives.

2. Risks Associated with Fixed Income Funds

While fixed income mutual funds may carry relatively lower risks, they aren’t completely risk-free. Some key risks include:

• Credit Risk: The issuer of the debt security may delay or fail to repay interest or the principal amount. Credit risk may be lower for funds that invest in G-Secs and high-rated debt instruments.
• Interest Rate Risk: When interest rates rise, the prices of existing debt securities falls, affecting the fund's value.
• Liquidity Risk: If there are few buyers for rarely traded bonds and debt securities, the fund manager may be forced to sell these at a loss. 

3. Investment Duration

Fixed income funds have different investment durations, ranging from a few days to years. Remember to choose a fund based on your investment timeline. 

4. Fund’s Past Performance 

Review the past performance of the fund across the last 5-10 years, comparing it with peers and benchmarks. This will help you understand how the fund has performed in the past. 

Note : Past performance does not guarantee any future returns and not necessarily indicative of future performance of the schemes.

5. Fees

Check the expense ratio and exit load before investing. These costs can affect your overall returns. A lower expense ratio is always preferred as it means more of your money stays invested rather than being used to pay fees. 

Now you know everything about fixed income mutual funds. They’re basically debt funds that invest in fixed-income securities like government bonds, debentures, and money market instruments that offer relatively stable returns at a potentially lower risk than equity funds. 

This profile may make them suitable for investors seeking:

• Potentially steady income
• Diversification beyond equities
• Potentially lower risk as compared to equity funds

That said, fixed income mutual funds also carry varying levels of credit and interest rate risks. Before investing, understand what the fund invests in, the risks involved, and how long you plan to stay invested. Choose a scheme only if it fits your financial goals and investment objectives. 

1. Are fixed-income mutual funds is risky?

Yes. While fixed income mutual funds may be relatively less risky than equity funds, they do carry risks. Depending on the scheme, they may be exposed to different level of interest rate risk, credit risk, and liquidity risk. Before investing, read the Scheme Information Document (SID) to understand the risks associated with the fund. 

2. How are Fixed Income Mutual Fund Gains taxed?

Fixed income mutual funds follow debt MF taxation rules. For units bought on/after 1st April 2023, capital gains are treated as STCG regardless of the holding period. They're added to your annual taxable income and taxed at the applicable income tax slab rate.  For units bought before 1st April 2023 and held for more than 24 months, LTCG applies at 12.5%. If units are sold at/before 24 months, STCG applies at slab rate.

3. Can you consider investing in fixed income mutual fund?

That depends on your financial goals, investment horizon, and risk appetite. These funds may show less volatility than equity funds that invest in stocks. This might make them suitable for conservative investors seeking slightly better potential returns than FDs and savings accounts. However, please read the Scheme Information Document to understand the risks associated with the fund before investing.