What Are Fixed Income Mutual Funds: Features, Benefits & Taxability
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21 April 2022Fixed income mutual funds are debt funds that primarily invest in fixed-income securities. Government bonds, corporate bonds, debentures, and different money-market instruments are examples of fixed income mutual funds. These funds are less risky and help in portfolio diversification.
This post discusses what are fixed income mutual funds, their features, benefits, types and taxability. Keep reading!
What Are the Different Types of Fixed Income Mutual Funds?
Many types of fixed income mutual funds are available to people for investment. So, investors looking to diversify their portfolio can look into the following options:
- Overnight funds: These funds invest in debt instruments that have a maturity period of one day.
- Gilt funds: They invest at least 80% of the fund corpus in government securities having different maturity periods.
- Floater fund: Floater funds invest a minimum of 65% of the financial assets in floating rate instruments.
- Gilt funds with 10-year duration: These schemes invest at least 80% of fund corpus in government securities such that the portfolio’s Macaulay duration is 10 years.
- Corporate bond funds: These funds invest at least 80% of the investment corpus in AA+ and higher-rated corporate bonds.
- Credit risk fund: Here, a minimum of 65% of the total fund corpus is investment occurs in corporate bonds rated AA or below.
There are many other types of fixed income funds, such as the following:
- Dynamic bond
- Long duration bond
- Banking and PSU fund
- Medium duration fund
- Medium to long-duration fund
- Short duration fund
- Ultra-short duration fund
- Low duration fund
- Money market fund
- Liquid fund
Also Read: What Is Expense Ratio In Mutual Funds And How Is It Calculated?
What Are the Features of Debts Funds or Fixed Income Mutual Funds?
Individuals thinking of investing in debt funds must know about its features. These include:
- Low risk
Debt funds are associated with low risk since they are not affected by market fluctuations. Instead, a change in the interest rate regime affects their price. This is because investment in debt funds takes place in fixed income securities.
- Fixed investment duration
Fixed-income mutual funds invest in securities like government bonds and debt instruments, which mature only after a specific date. In other words, if individuals who invest in such financial securities have to recover all his/her money, they have to wait to receive it by way of interest and repayment of the principal amount.
The duration until which an investor has to wait will depend on the investment option they have availed. For example, if it is overnight securities, then the waiting period is 1 day.
- Low capital appreciation
Debt funds offer low capital appreciation as these schemes carry out investment in securities that provide fixed interest income. The proportion of income that a fund earns via interest and in the form of capital gains depends on the type of debt instrument in the portfolio.
What Benefits Are Associated with Fixed Income Mutual Funds?
The following are the benefits that one can enjoy if he or she invests in fixed income mutual funds:
Flexibility in investment
By investing in debt funds, investors get high flexibility when switching to different funds. For example, investors can allocate a lump sum amount in fixed-income schemes and transfer a part of the amount to equity or other funds at a particular frequency. Thus, the risk associated with equity gets spread out, helping people to stay invested for a long period to maximise portfolio returns.
Stability in income
There are two ways of earning income through fixed income mutual funds — one is through interest gained, and the other is the amount received at maturity. Both of these incomes are fixed, and thus these funds can offer stability.
So, if you are an investor who desires to earn a stable income by investing in debt funds, visit www.navimutualfund.com, and check out the different debt mutual fund schemes offered by Navi. Once you pick a fund, you can start investing with an amount as low as Rs. 500.
Highly liquid
In the case of fixed income mutual funds, investors can redeem their units any time they want. They simply have to place a request with the Asset Management Company (AMC) for the same. The amount will be transferred to their bank account within 1-2 working days.
Tax Implications of Debt Funds
Incidence of taxation only comes up when assessees sell their debt fund units. However, the tax rate will depend on the holding period. If assessees sell their units before 3 years, the realised returns will come under short-term capital gains (STCG). Such gains will be taxable as per the applicable tax slab.
However, if they sell the units after three years, the realised returns are termed long-term capital gains (LTCG). A tax rate of 20% is imposed on them after calculating indexation benefits.
Also Read: Taxation In Mutual Funds
Final Word
All in all, debt funds are a suitable option for earning a stable income and better returns than bank FDs. In addition, they provide investors with the option of diversifying their portfolio. To know about these fixed income securities, make sure to read every subheading in detail.
FAQS on Fixed Income Mutual Funds
Ans: A maturity period is a date on which the security issuing company must repay the investor’s principal amount. In addition to this, note that the issuer also needs to pay regular interest on the debt securities to the investor.
Ans: Yes, in the case of fixed income mutual funds, the option to invest through SIP is available. This means they have the SIP benefits of equity funds but do not come with the volatility risk, providing investors with enough opportunity to meet their financial goals.
Ans: The following are some of the aspects that you need to look for before investing in debt funds:
1. Expense ratio
2. Credit quality of the fund
3. Track record of the fund manager
4. Risk appetite
5. Past performance of the fund
Ans: To know about the credit quality of a debt fund, one needs to look into the credit rating profile maintained by AMCs containing the facts about different companies. So, before investing, all investors must first visit the AMC’s website and analyze the factsheet for insight.
Ans: No, investments in debt funds are not eligible for tax deduction under the Income Tax Act, 1961. If investors are looking to reduce their tax liability, they can consider allocating their money to ELSS funds. Under Section 80C of the IT Act, one can claim tax deduction of up to Rs. 1.5 lakh for investment in ELSS funds.
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Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
