Understanding What Is Fixed Income Mutual Funds

Want to invest in a non-volatile scheme that offers regular income on your investment? Read on to know what fixed-income mutual funds are, how they work, their types, and should you invest in them.

Getting started with Fixed Income Mutual Funds

For many Indians at the beginning of their career, salary is their only source of income, and they often utilise it to meet their day to day expenses. Rising inflation and the increasing cost of living make it quite challenging to follow a disciplined saving routine every month. Wouldn't it be nice to invest in a financial instrument that generates an additional source of income? Well, Fixed Income Mutual Funds offers you just that. So, what is a fixed income fund? Let's find out.

What is a Fixed Income Fund?

A fixed-income fund is a type of mutual fund that aims to generate periodic returns on your investments until it matures. On maturity, you receive the invested amount. Although you get returns on frequent intervals - monthly, quarterly, half-yearly, or annually, the amount depends on the performance of your mutual fund.

A fixed-income fund focuses on generating a regular source of income for its fund holders. Just like a regular mutual fund, a fund manager or fund house revises your portfolio for these funds periodically. As a result, these funds generally offer better returns than the interest rates offered by savings accounts in the nationalised banks.

Key Components of Fixed Income Funds

Now that you know what a fixed-income fund is , let's discuss its key components:

Debt Funds:

Rather than investing in the uncertain stock market, debt funds invest in safer instruments like the Government securities or corporate bonds. These are low-risk investments available as short, medium, and long-term bonds. Depending on where they invest, the following are the most common types of debt funds:

Type of Debt Funds Investment Instrument
General Debt Funds Government and private schemes such as bonds, Certificate of Deposits, etc.
Gilt Funds Long-term government securities
Monthly Income Plans Significant investment in debt funds, rest in equity
Liquid Funds Short-term debt funds like term deposits, Certificate of Deposits, etc.

Money Market Funds (MMF):

Another low-risk investment medium, this fund invests in the steady-income money markets like treasury bills, commercial bills or papers, bank certificates, etc. Money Market Funds have a lock-in period of 15 days and are ideal for short-term investments. Since these funds invest your money in high-quality markets, it offers risk-free returns.

Exchange-Traded Funds (ETF):

These are index funds and trade on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) as stocks. ETFs trade on a day to day basis and there is no limit on the number of units you can buy. They help in diversifying your investment portfolio, and intraday trade provide high liquidity to your investment.

Taxation of Fixed Income Mutual Funds:

For tax calculation, these funds are similar to the debt funds. The tax would depend on whether the gains are short-term or long-term. If the holding period of the fund is less than 36 months, they are considered as short-term gains, and if the holding period exceeds 36 months, the gain from such sale are considered as long-term gains.

For short-term capital gains, the profits add to your total income for the assessment year, and you have to pay taxes as per your tax slab. However, for long-term capital gains, you have the option to pay taxes either @20% with indexation or @10% without indexation.

Who Should Invest in Fixed Income Mutual Funds?

These funds offer a separate source for generating steady income without any stock-related risks. For beginner investors, these funds can be a secure learning medium or introduction to stocks. Similarly, retired persons and pensioners can look forward to investing in these funds to create an extra source of income to meet their contingency expenses. These low-risk funds are ideal for short-term investment and offer high liquidity.

Fixed Income Funds: For Conservative Investors

Rather than increasing the value of your investment, fixed-income funds provide steady returns at regular intervals. Since your investment goes mostly in government securities and corporate bonds, the risks are quite less. By offering high liquidity, these funds are the ideal short-time investment instrument for conservative investors.