Over a period of time, mutual fund investment has emerged as a feasible and promising investment tool that gives excellent returns to investors by investing their money in markets. As there are different types of mutual funds available for investors who can choose basis the amount they wish to invest, time period of investment, their expectations, and market condition. Before one chooses to invest, it is necessary to have adequate knowledge about various types of mutual funds available. One popular option is investment in fixed income mutual fund schemes. Let’s know what these schemes are and why one should invest in them.
What are fixed income securities?
As their names indicate, a fixed-income security is debt instrument issues by a government, a corporate or other entity to finance and expand their operations. Fixed-income securities are meant to provide investors a return in the form of fixed periodic payments and eventual return of principal at maturity.
Fixed income schemes involve investment in fixed income securities such as bonds, money market instruments, corporate debentures, government securities (Gilts) etc. One primary reason why a large number of investors choose this option is to invest in a variety of Debt and Money Market Instruments of different maturities to get steady income while maintaining a perfect balance between yield, safety and liquidity.
Another reason is that these funds are found to be less risky and promote potential capital appreciation on investments with respect to variation in yield/interest rates.
These funds invest primarily in securities that have fixed maturities and rates of interest. They can be appropriate for both conservative and aggressive investors, depending upon the type of securities in the fund. The total returns given by these funds are generally determined by interest rates.
Irrespective of the kind of underlying security an income fund invests in, most income funds share a few common features, such as diversification and professional management. A majority of income funds pay either interest or dividends (or both) on a monthly basis. Some funds tend to become more liquid than others and the yields on almost all of them rise and fall with interest rates.
Investors looking to invest in fixed income schemes could choose debt funds that invest in short-term papers. After the recent rate cut, the RBI has deducted a total of 150 basis points since the beginning of 2015 when rate easing started and fund managers say further aggressive rate cuts are unlikely.