Mutual funds investments are safer than direct investments into stocks. However, one problem with certain types of mutual funds like ELSS is that they lock in your money for a specific period, during which you are unable to use the funds in question. This lock-in feature is often difficult to handle for the young investor, which is why fixed income mutual funds are a great option for these people.
What are fixed income funds?
Fixed income mutual funds are schemes where investors earn returns after regular intervals, such as quarterly, monthly or half-yearly. The rate of return may change over time, which is why the income may not be a fixed amount. Furthermore, the return depends on the performance of the specific fund as well.
There are three main instruments of fixed income mutual funds that an investor can take advantage of if they are looking for regular returns.
Components of fixed income funds
- Debt Fund
Debt funds invest in debt instruments, such as corporate bonds, government securities, and debentures. Market volatility is limited and returns from debt funds are usually predictable. Common types of debt fund include-
- General debt funds- These schemes invest your money into general government securities and debentures.
- Monthly income plans- Also known as MIPs, investment in these schemes will result in monthly, quarterly, half-yearly or annual payouts. Here, a majority of the sum is invested into debt instruments, while the remaining is invested into equities.
- Gilt funds- These are long-term investments into government securities, where the rate of return varies greatly over time.
- Liquid funds- Most investors wonder what is liquid funds? It is a kind of fixed income mutual fund, where your money is invested in treasury bills and certificate of deposits. The maturity period is between 3 and 6 months.
- Exchange Traded Funds
Index funds are known as Exchange traded funds or ETF, as they are exchanged in the stock market. Investors are free to buy as many units of ETFs as they like, without any restrictions. Since investors have the option of buying and selling at any time, ETF investments offer great liquidity.
- Money Market funds
Money market mutual funds are those schemes where the money is invested exclusively into commercial bills, commercial papers, certificate of deposit and treasury bills. The minimum lock-in period is 15 days and the market is regulated by SEBI.
Features of fixed income funds
Now that you know what liquid funds and debt funds are, you need to understand the basic features of fixed income mutual funds.
- Provides regular income to the investor
- Can act as an alternate source of income for retired persons, apart from the pensions
- Managed by professional fund managers, so that the return remains profitable for the investors
- Stable returns even when there is a major disturbance in the market.
Keep these fixed income mutual funds features in mind before investing, to ensure the maximum returns.
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