18 May, 2025
6 mins read
Investment in mutual funds has been steadily gaining popularity among Indian investors, driven by growing financial awareness and the desire for diversified, professionally managed portfolios. Among the various categories available, fixed-income mutual funds have emerged as a preferred choice for those seeking stable returns with relatively lower risk. In this article, we will explore what fixed mutual funds are, their types, benefits, and factors to think about before you invest.
Fixed-income mutual funds, also called debt funds, invest in safe options that offer steady returns. The securities in which fixed income funds invest include government securities, corporate bonds, and money market tools. The main goal of these funds is to create regular income through interest payments from these securities.
Unlike equity funds that can be volatile and riskier, fixed income funds offer more stable returns. This makes them attractive if you have a lower tolerance for risk.
There are several types of fixed-income funds in India. Each type serves different investment periods and risk levels:
Overnight Funds invest in securities that mature in just one day. You can easily access your money, making them perfect for temporarily storing extra cash.
Liquid Funds invest in debt instruments with maturities up to 91 days. They give better returns than savings accounts while letting you access your money quickly.
Ultra Short Duration Funds invest in debt instruments with 3 to 6-month maturities. They balance low risk with decent returns.
Low Duration Funds focus on investments with 6-month to 1-year maturities. These work well if you want balanced returns without much risk.
Money Market Funds invest in money market instruments having a maturity of up to 1 year. They provide stable returns with relatively low risk.
Short Duration Funds hold securities that mature in 1 to 3 years. They maintain a balance between potential rewards and exposure to market volatility.
Medium Duration Funds invest in bonds with 3 to 4-year maturities. They carry some risk but offer higher returns than shorter-duration funds.
Medium to Long Duration Funds invest in debt and money market instruments with maturities between 4 to 7 years. They offer potentially higher returns but come with increased interest rate risk.
Long Duration Funds invest in debt and money market instruments with maturities greater than 7 years. They have higher interest rate sensitivity and are suitable for investors with a longer investment horizon.
Dynamic Bond Funds allow managers to adjust the portfolio based on interest rate changes. This gives them flexibility to adapt as markets shift.
Corporate Bond Funds invest a minimum of 80% in corporate bonds, focusing only on AA+ and above-rated corporate bonds. They aim to provide relatively stable returns with moderate credit risk.
Credit Risk Funds mainly invest in lower-rated corporate bonds. These options seek to deliver greater returns while carrying risks of default or downgrade.
Banking and PSU Funds invest a minimum of 80% in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions, and Municipal Bonds. They typically offer lower credit risk compared to funds investing primarily in corporate debt.
Gilt Funds invest a minimum of 80% in government securities across various maturities. They carry minimal credit risk but may have interest rate risk depending on the maturity profile.
These funds invest a minimum of 80% in government securities, with the portfolio structured to maintain a Macaulay duration equal to 10 years. They are more sensitive to interest rate changes.
Floater Funds invest a minimum of 65% in floating-rate instruments (including fixed-rate instruments converted to floating-rate exposures using swaps/derivatives). They typically perform better in rising interest rate environments.
Fixed-income mutual funds work best for certain types of investors:
Conservative investors who want stable income with the safety of their capital.
People with short to medium-term financial goals, like saving for a vacation or building an emergency fund.
Investors looking to diversify their portfolios and reduce overall risk by balancing exposure to stocks.
Retirees or those nearing retirement who need regular income with lower risk.
Young professionals who want to grow their savings without facing high market volatility.
When you choose fixed-return mutual funds, you gain several advantages:
These funds show less volatility than equity funds, making them suitable if you prefer to avoid big market swings.
The returns tend to be more stable and predictable compared to stock investments.
Your principal investment gets better protection because the funds invest in debt securities that earn fixed interest.
By spreading your money across various debt instruments, you face less risk than if you bought a single bond or fixed deposit.
Many of these funds distribute interest income regularly. This feature helps if you need periodic cash flow.
Professional fund managers actively handle the portfolio, choosing securities based on credit quality and interest rate outlook.
You'll enjoy better liquidity compared to fixed deposits. You can redeem your units when needed.
The tax treatment is also favorable, as tax applies only when you redeem against an FD where interest is taxed every year. For units purchased after April 1, 2023, capital gains are added to your income and are taxed according to your tax slab.
Before you select a fixed income fund, think about these important factors:
Financial Goals: Consider your financial goals. Are you looking for capital safety, regular income, or moderate growth?
Time Perspective: Align the maturity period of the chosen fund with how long you plan to keep your money invested. Choose short-term funds for near-term goals and medium or long-term funds for distant goals.
Risk Appetite: Assess your comfort with risk. While these funds carry less risk than equity investments, they aren't risk-free.
Interest Rate Risk: Be aware of interest rate risk, where bond prices fall when interest rates rise. This affects fund returns, with longer duration funds being more sensitive to rate changes.
Credit Risk: Pay attention to credit risk. There's always a chance that issuers might default on payments. Check the credit quality of the securities in the fund's portfolio.
Liquidity Risk: Also consider liquidity risk, as some funds may hold securities that are hard to sell quickly without affecting prices.
Expense Ratio: Look at the expense ratio. A lower expense ratio means you keep more of your returns.
Tax Implications: Understand the tax implications before investing, especially if you plan to redeem within a short period.
Fixed-income mutual funds offer a good fixed return investment option if you seek stability, regular income, and capital preservation. With many fund types to match different goals and risk levels, these funds can help build a balanced investment portfolio. Remember to evaluate your financial objectives, risk tolerance, and investment horizon before choosing a fund.
Fixed income mutual funds are generally safer than equity funds since they focus on debt securities and show lower volatility. However, they involve some risks, including interest rate risk, credit risk, and liquidity risk. While not completely risk-free, they suit conservative investors who want stable returns.
No, fixed-income mutual funds don't guarantee returns. Your returns depend on how the underlying securities perform, interest rate movements, and credit events. While these funds aim to provide steady income, returns can vary and aren't fixed or assured.
Both fixed income funds and fixed deposits are popular fixed income investment options in India, but they differ in several ways. Fixed income funds offer potentially higher but variable returns with better liquidity and tax advantages, as capital gains tax is levied only on redemption, while carrying moderate market risk. FDs provide guaranteed returns with virtually no risk, but face early withdrawal penalties and less favorable taxation at your income slab rate.
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