Fixed Income Funds Benefits & Risk : As inflation is rising, investors want consistently better returns on their investments despite market volatility and economic uncertainty. Fixed income mutual fund is an investment option that can provide stability and potentially better returns. Fixed Income Mutual Funds are an investment option that mainly invests in asset classes like government securities, corporate bonds, debentures and other money market assets. The objective of these funds is to generate income for investors through regular interest payments from the securities included in the portfolio. These are, in a way, debt funds. So is the income of investors in fixed income funds fixed?
Retirement: Rs 1 crore will be in your pocket along with provision of pension of Rs 1.25 lakh, saving Rs 250 per day in NPS will help.
Components of fixed income fund
Fixed income funds are not a separate category of mutual funds based on investment method. These funds may include debt funds, money market funds, exchange-traded funds (ETFs) or certificates of deposits (CDs or fixed deposit schemes).
Debt Fund: Debt funds do not invest in the stock market, but prefer government and corporate bonds and other safe options. In these, the risk is less and the returns are stable.
Money Market Fund: Money market funds invest in fixed income instruments such as treasury bills, commercial papers issued by corporations, CDs. These are directly affected by any increase in interest rates and hence are better for short term investments up to 90 days.
Exchange-Traded Fund (ETF): ETFs are index funds that are listed and traded on exchanges like stocks. ETFs can be bought and sold in the cash market. Gold ETF is its most popular.
Power of Compounding: Every year’s delay in investment reduces the power of compounding, there will be a difference of lakhs in returns.
Features of Fixed Income Mutual Funds
The objective of this fund is to generate returns by investing in bonds and other fixed income securities. This means that these funds buy bonds and earn interest income on the investment.
Fixed income securities have low volatility, and are less affected by market fluctuations.
Debt funds are invested in both debt and money market instruments (like commercial papers, treasury bills and more). It brings forward the feature of debt funds having a diversified portfolio and can give higher returns than bank deposits.
Debt funds earn interest, which is paid by the bonds and debentures underlying the scheme, along with the potential for value appreciation.
Moreover, these funds usually do not have a lock-in period. This means investors can withdraw their money from the fund whenever they want subject to exit load and other expenses, if any.
When fixed income funds are compared to other mutual funds (such as equities), they are considered relatively low in risk. It also gives some stability to your investment portfolio by balancing your portfolio and reducing overall risk.
NSC: Profit of less than Rs 5 lakh on investment of Rs 10 lakh, interest income is taxed
These options are not risk free
If interest rates start rising, bond prices fall and if rates fall, bond prices rise. This change in the price of the bond will result in capital gain or capital loss. This is the first source of returns. The second source of return is the interest earned on the bond based on the coupon rate of the bond. That is, it can be said that fixed income options are not completely risk free. Some of these risks are…
interest rate risk
credit risk
Liquidity related risk
Inflation related risk
Who is the right option for?
Fixed income funds are a better option only for those investors who want to stay away from market risk and invest cautiously. These do not provide growth opportunities like equity funds, hence returns are also lower. However, it would be wise for investors to invest some of their money in fixed income or debt funds, so that their portfolio can be balanced. This saves all their money from being at risk in case of economic recession.
(sources: Amfi, financial websites)