What Are Fixed Income Mutual Funds?

When you start investing in mutual funds for the first time, you will find that there are various kinds and categories – from equity and debt funds to hybrid and solution oriented schemes funds. Most people typically invest in equity and debt mutual funds. Debt funds, also known as fixed income funds, are becoming increasingly popular. Let’s find out what they are.

What Are Fixed Income Mutual Funds?

Fixed income or debt mutual funds are those that focus on investment instruments which pay a fixed or set returns rate. The objective of this category of mutual funds is to provide investors with stable returns. The idea behind this investment is to create a fund portfolio that generates income through interest payment and capital gains which is passed on to the investor. The amount you receive from these funds primarily depends on your mutual funds’ performance.

Like all other mutual fund schemes, these funds are also managed by professional fund managers by pooling resources from various investors. As per SEBI categorisation, there are 16 categories of debt funds. They are as under:

Overnight Funds

Overnight Funds are open-ended debt schemes that invest in overnight securities having maturity of 1 day.

Liquid Funds

Like Overnight funds, Liquid Funds are also open-ended, fixed income funds. These funds invest in both debt and money market securities having a short maturity period of upto 91 days only.

Ultra-Short Duration Funds

Ultra-Short Duration Funds invest in debt and money market instruments such that the Macaulay duration of the investment portfolio is between 3 and 6 months. Macaulay duration is the time an investor would take to get back all his invested money in the bond by way of periodic interest as well as principal repayments. These are also open-ended debt schemes.

Low Duration Funds

Low Duration debt funds invest in debt as well as money market securities such that the Macaulay duration of the investment portfolio is between 6 months and 1 year. Like Ultra Short Duration funds, low duration funds are also open-ended, short duration schemes.

Money Market Funds

Money Market Funds are open-ended debt schemes that invest in money market instruments having maturity upto 1 year.

Short Duration Funds

Short Duration Funds invest in debt and money market instruments such that the Macaulay duration of the investment portfolio is between 1 and 3 years. Like all other short duration fund categories, these funds are also open-ended debt schemes.

Medium Duration Funds

Medium Duration Funds are open-ended medium-term debt schemes. They invest in debt and money market instruments. Here, the Macaulay duration of the investment portfolio is between 3 and 4 years.

Medium to Long Duration Funds

Medium to Long Duration Funds are also open-ended debt schemes, which invest in debt and money market instruments. For these debt fixed income schemes, the Macaulay duration of the investment portfolio is between 4 and 7 years.

Long Duration Funds

Yet another open-ended debt fund scheme, long duration funds, like all other debt funds mentioned above, invest in debt and money market securities. The only difference here is that the Macaulay duration of the investment portfolio is more than 7 years

Dynamic Bond Funds

A Dynamic Bond Fund is an open-ended fixed income scheme, which does not come with any predetermined investment portfolio duration. Fund can invest across any durations of their preference as per the market.

Corporate Bond Funds

The Corporate Bond Fund open-ended scheme invests approximately 80% of the total assets in some of the highest rated corporate bonds.

Credit Risk Funds

The Credit Risk Fund open-ended scheme invests approximately 65% of the total assets in the below-highest rated corporate bonds.

Banking and PSU Funds

This open-ended debt Fund scheme invests approximately 80% of its total assets in debt securities of entities such as banks, public financial institutions, public sector undertakings and so on.

Gilt Funds

The Gilt fund is yet another open-ended debt fund scheme with no specific maturity period. It invests approximately 80% of its total assets in various types of government securities.

Gilt Fund with 10-year Constant Duration

A gilt-fund with specific investment duration, this fixed income scheme invests 80% of its total assets in various types of government securities such that the investment portfolio’s Macaulay duration is 10 years

Floater Fund

The last type of SEBI-categorised debt fund, the floater fund is an open-ended debt fund instrument, which predominantly invests in floating rate instruments. These funds invest approximately 65% of their total assets in various floating rate instruments. These instruments do not offer fixed returns, unlike other debt instruments. The return is linked with some external benchmarks and can fluctuate due to a change in the benchmark.

Fixed-income mutual funds, which have a short Macaulay duration, are the ideal investment instruments for conservative investors looking for steady income sources. Pensioners and retired people, for instance, can benefit from investing in these low-risk mutual funds, which also offer high liquidity.

To invest in fixed income funds, open your investment account today.  

Disclaimer: ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470.I-Sec acts as a distributor to distribute Mutual Funds. AMFI Regn. No.: ARN-0845.Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Distribution of Mutual Fund is not exchange traded product. I-Sec. is just acting as a distributor and all disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism.