Fixed Income Funds

Fixed income funds are mutual funds or investment avenues that give you returns at fixed intervals. This income may not be a fixed amount, though, and will depend on the performance of the fund.

Components of Fixed Income Funds

Fixed income funds are not a separate category of mutual funds based on the kind of investment, but rather depends on the style of investment and expected returns. These funds may consist of debt funds, money market funds, exchange-traded funds (ETFs), or Certificates of Deposit (CDs or Fixed Deposit schemes). Let’s take a look at each of the above kinds of fixed income-generating instrument:

Debt funds: Debt funds do not invest in the volatile stock market, but prefer safe instruments such as government and corporate bonds and other securities. The profile is low-risk and the returns are stable.

Money Market Funds: Money market funds invest in steady-income tools such as treasury bills, commercial paper issued by corporations, short-term bank certificates of deposit (CDs) and banker’s acceptances. These are directly hit by any increase in interest rates and hence are good for short-term investment of up to 90 days.

Exchange-Traded Funds (ETFs): ETFs are index funds that are listed and traded on the exchange like stocks. These indices reflect the changes in the index it associates with, such as Nifty, BSE Sensex or S&P. ETFs can be bought and sold in the cash market from day to day. Gold ETF is one of its most popular forms.

Features of Fixed Income Funds

  • Fixed income funds are focused not on capital appreciation but on remitting a fixed income to the fund-holder.
  • This kind of mutual fund is good for investors who are looking for a steady source of returns rather than increasing the value of their investment, such as retired persons and those with a low risk appetite.
  • Fixed income funds are actively managed. In order to manage the growth or depreciation of returns based on interest rate and economic changes, fund managers have to shuffle the portfolio regularly.
  • Fixed income funds aims at maintaining stable returns in spite of market upheavals or changes in economic situations.
  • These funds are highly liquid in nature, allowing the investor to withdraw or redeem their funds whenever they require money.
  • Debt funds provide better long-term returns than money-market funds or CDs, but ETFs are more profitable as they function quite like equity funds.
  • The taxes applicable to fixed income funds are those of debt funds. This means that any short-term capital gains are added to your income and taxed as per the slab rate, while long-term capital gains attract 10% tax without indexation and 20% tax with indexation.

Disadvantages of Fixed Income Funds

Fixed income funds are only good for highly cautious investors. They do not offer growth opportunities like equity funds and are low-risk, therefore low on returns as well. However, it will be prudent for investors to put some of their money on fixed income or debt funds so as to stabilise their portfolio and ensure that not all of their money is at risk in the face of an economic meltdown.

Among the top-rated fixed income funds in India are Axis Income Fund, Reliance Income Fund, DSP BlackRock Strategic Bond Fund and HDFC High Interest Fund – Dynamic Plan. High-performing ETFs in the country include UTI Gold Exchange Traded Fund, IDBI Gold Exchange Traded Fund, Birla Sun Life Gold ETF and SBI – ETF Gold.

GST rate of 18% applicable for all financial services effective July 1, 2017.

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