Introduction to fixed income mutual funds:
For someone who’s tired of the poor interest rates offered by FDs but still cannot afford the risks involved in the stock market, mutual funds are the way to go. However, if you want to further reduce your risk in the domain, fixed income mutual funds should be your first choice.
These are mutual funds that concentrate a significant amount of money into fixed income streams such as government securities, corporate bonds, and debentures. Also known as debt fund mutual funds, these funds aim at giving stable returns than a conventional equity based mutual fund. In this article, we will shed light on the pros and cons of debt mutual funds along with strategies to follow to choose the best fixed income mutual fund in India.
Advantages of fixed income mutual funds
A fixed income mutual fund comes with several benefits. They are comparatively a better alternative to FDs and equity if you are looking for the qualities mentioned below.
Stability in returns
Fixed income mutual funds act as a less risky investment option than an equity mutual fund because of the fact that equity funds can be extremely volatile due market fluctuations. Therefore, fixed income mutual funds help you create a diversified portfolio while helping you drastically bring down the overall risk.
Liquidity
In a fixed income mutual fund, you are able to withdraw your money whenever you need it, subject to exit load and other expenses, if any. It lacks a lock-in period unlike FDs that charge penalties for premature liquidation.
Flexibility
Debt funds promote valuable flexibility by enabling investors to switch between various funds. Unlike Fixed Deposits, they permit lump sum investments in one scheme while allowing periodic transfers into equity or other funds, spreading out investment risk over time.
Systematic investments
Every investor has their priorities in choosing an investment plan, hence, with proper analysis, a debt fund scheme can help you meet your long term financial goals with ease. Unlike the more popular equity funds, debt funds can offer more stable and predictable returns in the long run.
Lower market volatility
A fixed income mutual fund is less affected by varied market fluctuations as they are, in most cases, not linked to the stock market volatility.
Things to consider before choosing a fixed income mutual fund:
Fixed interest mutual funds aim at stabilising returns by diversifying one’s portfolio through investing across a variety of securities. These funds are known to perform predictably, however, one should keep in mind several factors that come into play before investing in one.
Fund category
These funds are further classified into various categories such as liquid funds, monthly income plans, fixed maturity plans, dynamic bond funds, income funds, GILT funds and short-term funds. There arises a necessity for you to carefully choose from the options available according to your objective and the amount of risk you are willing to take.
Risks
Even with stable and predictable returns, one thing to keep in the picture is that even fixed income mutual funds are not completely risk free. Even the best fixed income mutual funds are subject to interest rate risk, credit risk, and liquidity risk. They may or may not fluctuate with the change in interest rates, hence, make sure you have the risks sorted out before entering this investing domain.
Cost
These funds cannot charge you management fees above a set limit set by SEBI, however, debt funds charge you with an expense ratio that varies for different mutual funds plans.
Time frame
There is a diverse availability of maturity time frames for these funds which can go from merely days to 3 years or even more according to your preference. The return of investment is also noticed to be more than what FDs and banks have to offer within similar maturities.
Financial goals
Fixed income mutual funds or debt funds cater to a wide variety of investor objectives such as earning an additional income or earning much higher returns than a regular savings bank account. Evaluate your long term requirements and immediate needs before opting one.
Why you should invest in fixed income mutual funds in India?
If you don’t want to touch upon the world of equity and are looking to grow your funds with lesser risk, fixed income mutual funds are the best choice for you in India. With funds striving to provide stable and regular income streams, most choose them over riskier investments such as equity and less yielding options such as bank deposits.
These funds provide returns of at least 7% that can go to as high as 10% depending on the maturity period. However, if you are an investor looking for higher returns than debt funds but are not willing to step foot into equity, Tap invest is the perfect place for you. With financing options such as invoice discounting investment, asset leasing investment and bonds investment, get stable returns of up to 15%.
How to choose the best fixed income mutual fund in India?
Choosing the best fixed income mutual funds is indeed a complicated process. Past data and performance, even though not zen percent reliable, can be used as the primary tool for creating a healthy investing landscape. Let us take a look at key attributes of a debt fund that needs to be analysed before choosing these funds.
Past returns
The returns offered by the selected fund in the past are a good way of churning out the best in the business. Choose funds that have outperformed the benchmark and its peers for a safer investing strategy.
Fund history
Analysing the history of the fund is a great way to get a clearer picture of the consistency that it has to offer. The best debt funds have a decent track record ranging anywhere from 5 to 10 years.
Expense ratio
Expense ratio indicates the amount that goes into managing the fund. The lower the ER, the higher returns you get to take home. Hence, this a criteria to filter out the best from a number of fixed income mutual funds with similar return rates.
Financial ratio
Financial ratios such as standard deviation, Sharpe ratio, alpha, and beta are the most used tools to analyse these funds. A fund having higher standard deviation, and beta is riskier and is less preferred. Funds with a higher Sharpe ratio generally give higher returns with higher risk.
Conclusion
Fixed income Mutual Funds are one of the best options for investors seeking stable returns without the risk of market fluctuations affecting their investments. With returns varying from 7-10% completely based on the maturity time frame and bond, investors find this as the safest and most practical method of investment in India. However, proper research and financial advice is advised before choosing any investment schemes to avoid the inevitable risks that exist in the investing domain.
To know about more fixed income investment options, visit and signup on Tap Invest. Start Investing Today!
FAQs For Fixed Income Mutual Funds:
1. What are fixed income mutual funds?
A fixed income mutual funds are type of investment fund that primarily invests in fixed income securities such as bonds, treasury bills, and money market instruments. These funds aim to provide regular income to investors through interest payments and to preserve capital.
What is the best investment for fixed income?
The best investment for fixed income depends on your financial goals, risk tolerance.
Low risk: CDs, savings accounts, government bonds (lower returns)More risk, more return: Corporate bonds, high-yield bonds, bond mutual funds (higher risk)
3. Is it good to invest in a fixed income fund?
Fixed income funds can be a good investment, but it depends on your goals. Good for income, stability, and diversifying a stock-heavy portfolio. Not ideal for high growth or beating inflation.
4. What is the interest paid in fixed income mutual funds?
The interest paid in fixed income mutual funds varies depending on the prevailing interest rates and the performance of the underlying fixed income securities in the fund's portfolio. In general, interest rates range from 7-10% depending on the fund and tenure.
5. Which is the best fixed income mutual fund in India?
Determining the best fixed income mutual fund in India depends on factors such as investment objectives, risk tolerance, and performance metrics. With low yielding options such as liquid funds and higher yielding funds such as GILT, choosing the best fund for you takes proper consideration of risk management.
