Fixed Income Mutual Funds Unveiled: Ultimate Comparison, Key Features, and Top Picks

Investing is financial markets are always volatile and risky hence, getting a fixed returns is always everyone’s goal in their financial journey.

That’s why today I am going to discuss about fixed income mutual funds, how they work, does investing in them actually worth it or not, and much more.

So, let’s get started!

Fixed Income Mutual Funds

Fixed Income Mutual Funds as the name suggest aims to provide fixed income by investing in such securities that provide fixed interest.

Fixed income funds are nothing but a type of debt funds that invest in different debt options like money market funds, gilt funds, etc.

Earlier no such fund exist with name fixed but today different mutual companies has made it popular seeing the opportunity and a market gap.

They are designed by default in such a way that your capital remain safe and with that it keeps on growing with certain interest rate.

Hence, fixed income mutual funds in simple terms lend out the money to different corporates & government and on that they get a fixed income in terms of the interest they get, & that income they just pass on to the investors after cutting their fees.

But the most important question are they really safe as advertised on the internet?

Well, before analysing that, let’s checkout different types of fixed income funds.

Types of Fixed Income Mutual Funds

Fixed income funds are divided into multiple categories on the basis of investment period and the types of securities they invest in.

Let’s look out each one in detail.

Short Term Bond Funds

Short term bond funds are those who invest in such bonds having a short maturity period between 1-3 years with an objective to provide a steady while taking the lowest risk possible.

But as they go for low risk hence, the chances of getting the high returns are also get’s vanished.

Intermediate Term Bond Funds

Intermediate Term Bond Funds are those who invest in such bonds having a medium term maturity period between 3-10 years with an objective to provide a regular income while preserving the capital.

They take higher risk then the short term bond funds while maintaining the focus to get higher returns.

Long Term Bond Funds

Long term bond funds are those who invest in such bonds having a longer maturity period between 10years or more with an objective to high appreciation on your investment while taking a higher risk as compared to above one’s.

These type of funds are good if you have a good risk appetite and having a long term horizon while investing.

Other then these fixed income mutual funds there are Corporate Bond Funds, Government Bond Funds, Income Funds. etc. as per the financial securities they invest in majorly.

Key Features of Fixed Income Mutual Funds

• Provides Regular Income – Fixed income funds are tend to provide a regular income depending upon the financial securities they are invested in.
• Less Volatile – Short term bond funds
• Low Risk – There are some fixed income mutual funds that majorly invest in Cash Equivalent securities that tends to be very low risk in nature and hence such funds are very much liquid.
• No Lock In Period – Unlike Fixed Deposit that have some kind of lock in period, fixed income funds don’t have such restriction but in some cases you have to pay an exit load fees if you sell the fund before a certain time.

Should You Invest In Fixed Income Fund?

To understand whether you should invest in fixed income funds or not, first you need to write down your requirement based on risk appetite, investment horizon, financial stability.

• Risk Appetite – If you are someone who can’t take much risk on your money, especially if you are in your old age then you can think to invest in fixed income mutual funds. But do remember they are not 100% risk free like a Fixed Deposit (FD)
• Financial Stability – If you are looking for a source from where you can get a regular income probably monthly, quarterly, or annually, then fixed income funds can work for you.

But the most important thing you have to understand that this type of fund can’t give some big returns in short term or long term?

Why? There are 2 reasons for that:-

• The purpose of such funds to provide regular income while preserving the capital due to which short term bond funds are not even able to beat the inflation rate.

For example:

I have taken this short term fixed income mutual fund by icici “ICICI Prudential Overnight Fund Direct Growth”

It has given 5% average annual return since inception on 1 January, 2013.

Although it is a low risk fund with no lock in period, & no exit load (the fees mutual fund charges if you sell them before a certain time period).

But here you have to pay the fees to mutual fund for managing your money on your behalf and that is 0.1%.

Not only this, even on the gains too, you have to pay the tax on fixed income mutual fund that works similar to debt mutual fund taxation.

Hence, in last you will be in loss only.

On an average after deducting all the charges and fees usually these fixed income funds gives the net returns lower then 8.5% and then again you have to pay the tax on these gains.

Best Fixed Income Mutual Funds In India

While I highly advise to avoid investing in fixed income mutual funds due to low returns, mutual fund fees, and taxes on these funds.

Instead of fixed income funds you can consider investing in fixed deposit (FD).

Although they are also taxed as per your tax slab but they are highly safe as they are insured by RBI too. Thus, if your only priority is capital preservation then various FD also gives 7-9% annual return.

Else, you can invest in Equity Oriented Hybrid Funds as they provide more returns then debt funds and are taxed much lower then compared to the fixed income mutual funds.

While still, if you are interested in investing in fixed income funds then I have tried to find best fixed income mutual funds in India as of 2024, based upon there previous returns, Low Risk compared to returns, & the fees charged by mutual funds to provide you the best returns.

Here is the list of all best fixed income funds:-

• SBI Magnum Gilt Fund Direct Growth (Low to Moderate Risk)
• ICICI Prudential All Seasons Bond Fund Direct Growth (Moderate to High Risk)
• Nippon India Nivesh Lakshya Fund Direct Growth (Moderate Risk)
• HSBC Corporate Bond Fund Direct Growth (Low to Moderate Risk)

Final Words – Fixed Income Funds

Today lot’s of mutual fund companies started offering different products in order to meet the market demands.

But before investing, you should be aware of the prime reason behind that investment.

While fixed income mutual funds can provide a stable and consistent income but with that it bring some cons too that is you should not expect much net returns out of it.

If you are comfortable with that, you can have a look to some of the best fixed income mutual funds list I have shared above.

Disclaimer: The Honest American provides stock market news and strategies for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.