Fixed Income Mutual Funds in India: Types, Benefits, and Risks Explained

In India fixed income mutual funds have become a key component of a well rounded investment portfolio which also includes for people who want stability, regular income and capital preservation. These funds put mainly in fixed income instruments like government securities, corporate bonds, treasury bills and other debt based assets. As opposed to equity funds which ride on market fluctuations and company performance, fixed income funds which we also see to be   that which generates steady returns which in turn makes them appeal to conservative investors, retirees or those with short to medium term financial goals.

In India’s mutual fund market of Fixed Income products

There are different categories of fixed income mutual funds which target specific investment needs and risk appetites:.

Liquid Funds

These funds put into short term money market instruments which include treasury bills and commercial papers with maturities up to 91 days. Liquid funds are a hit for putting away extra cash for short time and we see better returns from them than savings accounts which is a plus they also present very little risk.

Ultra Short Duration Funds

These have a term of a little over 3 months to a year and a half. We see them as for investors which have low risk tolerance but at the same time are looking for a bit more return than what liquid funds offer still in a stable environment.

Short Duration Funds

These assets we put into debt instruments which have a term of one to three years. We see these as very good in terms of return and risk which is why they are best for investors that have a medium term investment horizon.

Medium to Long Duration Funds

These funds put money into instruments that range from 3 to 7 years out to maturity. They do provide higher return than short duration funds but at the same time have greater sensitivity to interest rate changes.

Corporate Bond Funds

These mainly put into high rated corporate bonds which is a relatively safe play while still very competitive in terms of returns. Also for people who want better returns from what they get from government securities but do not wish to increase credit risk, these are for you.

Gilt Funds

Gilt issues only in government securities which they do not diversify from. They do not have credit risk but very much so to interest rate changes. These are for risk averse investors which seek out sovereign security.

Credit Risk Funds

These funds put in to lower rated corporate bonds which in turn produces high interest for the fund. Although this has the chance for better returns the risk of default and rating downfalls is higher.

Benefits of Fixed Income Mutual Funds

Stability and Predictable Returns

In terms of what they offer investors one of the great values of fixed income mutual funds is that they provide a very predictable and stable return which you don’t see in equity based funds. Also they do very well during turbulent stock market conditions or economic instability.

Regular Income

Many income oriented funds provide for in regular interest distributions. That feature is very attractive to retirees and to those that prefer a consistent income which does not come out of the base investment.

Professional Management

Fixed income funds which are managed by expert fund managers that which they put forward into what the markets are doing, what the trend in interest rates is, and the credit ratings of various products. This in turn allows individual investors to benefit from professional input which they may not have access to should they try to manage their own debt investments.

Tax Efficiency

Debt mutual funds that have been held for more than three years are entitled to long term capital gains tax with indexation benefits. Thus they outperform traditional fixed deposits in the long term.

Liquidity

Unlike what is present in the case of fixed deposits which have a lock in period, most fixed income mutual funds allow for redemption at any time. This flexibility also makes it easy in the case of emergency access to your funds although in some cases an exit load may apply.

Diversification

These funds put money into a large variety of securities which in turn spreads the risk out over many different issues and issuers. This in turn puts to a minimum the effect of a single default or adverse event on the whole portfolio.

Fixed Income Mutual Fund Risks

While it is a fact that fixed income investments are for the large part a safer option than equities, there are still risks:.

Interest Rate Risk

Bond prices and also are of an inverse relationship with interest rates. As interest rates go up the value of existing bonds (which have lower yields) goes down which in turn may put the net asset value (NAV) of the fund at risk. Long duration funds are more so at that risk.

Credit Risk

This is the risk that the issuer of the bond will default on payment or will see their credit rating lowered. In the case of credit risk funds which put money into lower rated bonds this risk is very much a factor.

Liquidity Risk

In some market conditions it is that at which fund managers may have difficulty in selling debt securities at the prices they wish for. This results in delays of redemption and in a drop of the NAV in the case of funds that hold lower rated or less traded issues.

Reinvestment Risk

If interest rates drop we may have to reinvest that income from matured securities at lower rates which in turn may reduce total returns.

Inflation Risk

If in fact fixed income investments do not outperform inflation your real value will deteriorate over time.

Conclusion

Fixed income mutual funds are a great addition to any investment portfolio especially for those looking to protect what they have while still seeing moderate growth. They also present a regular income, a feature that also includes ease of access to your money and at times tax benefits which in turn play a role in what may be best for a wide range of investors. But also at the same time it is important that the type of fixed income fund you choose fit in with your financial goals, investment time frame and risk tolerance. Also read the fund’s offer document, look at the past performance, and should you need it, talk to a financial advisor to see how it fits into your over all financial plan.