Fixed Income Mutual Funds in India 2024

A mutual fund is one of the best options for investors to grow their money for their future needs. There are various types of mutual funds available for different types of investors, Fixed income mutual fund is one category of them that aims to provide stable and regular returns to its investors with lower risk. So in this article, we will look into What are Fixed income Mutual funds, how they work, and the list of the top 10 best fixed income mutual funds.

What is Fixed Income Mutual Fund?

fixed income mutual funds are mutual funds where the fund house tends to invest most of its corpus in fixed income securities such as corporate bonds, Government securities, Debentures, and other money market instruments. These funds are generally known as debt funds. Furthermore, these funds offer regular returns to their investors through interests earned from the securities and also capital appreciation. Some of the examples of these funds include Liquid funds, Gilt Funds, Banking and PSU Funds, and so on. 

How do Fixed Income Mutual Funds Work?

They work like any other mutual fund. Instead of equity, the fund house invests in debt securities. Here, the fund manager invests investors' money in various debt instruments according to the interest rate, credit rating, return, and risks.

They invest in bonds, government securities, corporate bonds, and other forms of debt instruments in India. These forms of funds generate an interest payment along with a possible capital appreciation. Moreover, these funds are mostly less volatile compared to equity funds and hence are often recommended for risk-averse investors?

Importance of Fixed Income Funds

• Stable Income Generation: fixed income mutual funds provide regular interest flows from the underlying securities. They are the perfect investment vehicle for cautious investors, such as retirees, because they prioritize principal preservation and stable earnings over equities.

• Lower Risk Profile: These funds generally are less volatile than equity investments. Capital loss risk is relatively low since they invest in debt instruments that offer a fixed return. They are considered safer compared to stocks, especially when the market is falling.

• Diversification of Portfolio: Investment in mutual fund fixed income schemes would stabilize high-risk assets by offering more stable returns. It would save the equities from further losses because bonds normally outperform stocks when the stock market is declining.

• Liquidity: Contrary to fixed deposits, fixed income mutual funds offer liquidity, which is the freedom to access your money without waiting for long periods.

• Professional Management: fixed income mutual funds are actively managed by professional fund managers who monitor the market situations and changes in interest rates to make decisions about portfolio selection and management. This professional management can increase the return while at the same time minimizing the risks that could occur from the selected individual securities.

• Capital Appreciation Opportunities: While a primary focus is on generating returns in the form of income, there also can be capital appreciation if interest rates decline or if the credit quality of the underlying securities improves. That can drive up valuations of the fund's holdings.

Types of Fixed Income Mutual Funds

1. Long-term debt Funds - These are the funds that invest in fixed income securities such as corporate bonds, Government securities, and money market instruments with maturity periods between 7 to 10 years which makes it suitable for investors seeking long-term returns. 

2. Short-term debt Funds - These funds invest in different debt securities with maturity periods varying between one to three years. These are suitable for investors seeking short-term investment horizons.

3. Floating rate funds - These funds invest in debt securities like loans and bonds that offer a floating rate of interest. These interest rate often adjusts to the Mumbai Interbank offer rate (MIBOR). The primary goal is to minimize the fluctuations in the fund when the interest rates change.

4. Credit opportunity funds - These funds invest in corporate bonds that have less-than-ideal ratings. These funds invest because they offer higher interest rates to compensate for their low credit ratings. This might look like a good opportunity to get a higher interest rate. However, these funds Carry a higher risk of default. Thus it is suitable for risk-tolerance investors.

5. Gilt funds - These funds invest solely in government securities with both short and long-term maturities. These funds are exposed to the risk of interest rate fluctuations since they are invested in central and state government-issued securities.

6. Liquid funds - As the name suggests, these funds are highly liquid. Thus they invest in debt instruments with maturity of up to 91 days and can be redeemed quickly within one day.

7. Dynamic bond funds -  These fund houses invest in both short-term and long-term bonds depending on the anticipated direction of interest rates. Thus these debt securities have different maturities and these are actively managed by professionals who dynamically adjust the fund’s portfolio based on the market conditions and their view on interest rate movements.

List of Best Fixed Income Mutual Funds in India Based on Returns

Here is the list of the top 10 fixed income mutual funds in India with returns of 3 and 5 years along with their Risk and expense ratios.

Note: The data collected is as of 8th November 2024

Who Should Invest in the Fixed Income Mutual Funds?

fixed income mutual funds are typically suitable for those investors who are conservative, risk-averse, and those who seek regular income. 

Conservative Investors - Conservative investors are those who look for regular and stable returns instead of higher returns such as retirees or individuals who are nearing retirement often find fixed income mutual funds as a good option as they provide them regular and stable income.

Risk-Averse Investors - fixed income mutual funds are also suitable for risk-averse investors who don’t want to take risks on their hard-earned money in the market fluctuations can opt for these funds. Since these funds are more secure than the equity instruments.

How to Choose a Fixed Income Mutual Fund?

Choosing a fixed income mutual fund involves evaluating various factors such as assessing your risk and return profile, deciding on the duration of investment, past performance of the fund, fund manager’s track record, Expense ratio, and many more.

Assessing your Risk and Return Profile - if you are too risk averse you can choose government securities of AAA-rated corporate bonds as they have lower risk exposure.

Duration of the Investment - If you are looking for short-term like 1 - 3 Years, short-term debt funds might be suitable for you. Since they offer shorter durations for investment, if you are looking for a medium of long-term investment, dynamic bond funds or corporate bond funds might be suitable as they provide slightly higher returns along with moderate risks.

Analyze the Past Performance of the Fund -  Check the past performance and analyze how the fund generated returns in different interest rate cycles, further, check the consistency of the funds in providing returns to the investors.

Fixed Income Mutual Funds: How does Taxation work?

fixed income mutual funds are also known as debt funds, hence the tax applicable for debt funds is the same for fixed income mutual funds. The taxation on these funds can be categorized based on the date of investment made.

We can see 2 scenarios of taxation for investments made before 1st April 2023

1. If sold before 23rd July 2024, long-term capital gains (LTCG) (held for more than 36 months) are taxed at 20% with indexation benefit. STCG is taxed at the slab rate

2. If sold on or after 23rd July 2024, LTCG (held for more than 24 months) is taxed at 12.50%, and short-term gains are taxed as per your slab rate.

If the investment is made after April 1st, 2023, gains are added to your income and taxed at your slab rate, regardless of how long you invest.

How to Invest in Fixed Income Mutual Funds 

Here is a step-by-step guide for starting an investment avenue in mutual funds in India via Rupeezy.

Download Rupeezy App: First of all, you have to download the Flow app by Rupeezy from the Google Play Store/ App Store to start investing in the mutual funds.

Visit Website: Then, you will be redirected to the official website of Rupeezy to begin the account creation process where you are required to fill in the personal details.

Fill in Personal Details: Fill in all the details regarding personal information like name, address, PAN number, and contact numbers, and cross-check the details before moving into the next step.

Upload Documents: Kindly upload your KYC verification documents - Aadhar card, PAN card, bank statements, and other required documents to get the verification of your credentials.

eSign the Form: Lastly, sign your application form electronically to move forward in the process where you’ll be directed to set the password.

Set the Password: Now, after having received the client code, you may access the app and then set up a password so that the data and activity log will remain inaccessible.

Fixed income fund Search: Using the explore option, navigate to debt funds and there you will find different kinds of fixed income mutual funds. You can analyze and compare the returns of each fund before you start investing. 

Conclusion 

fixed income mutual funds are a good option for conservative investors who want stable and regular returns with relatively lower risk. They invest in government and corporate bonds that offer consistent and less vulnerability to stock market fluctuations. There are different options available to the investor, depending on the risk tolerance, investment horizon, and financial goals for choosing the best fund. The fund's actual performance depends on market interest rates, credit quality, and fund type. fixed income funds can also be very effective at diversifying a portfolio and providing a stable source of income for more long-term financial plans. However, investors are advised to do their research or consult a financial advisor before investing.

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