We all use mutual funds to grow our wealth over log term and to achieve our financial goals like purchasing a house, kids’ education, marriage, and retirement. However, at times during this journey, we may seek a safety cushion with stable cash flows and minimized risk in our investments to ensure peace of mind by investing in fixed income mutual funds.
What are Fixed Income Mutual Funds?
Mutual funds primarily invest in debt securities such as government bonds, corporate bonds, and money market instruments are referred as fixed income mutual funds.
These funds are designed to generate regular income through interest, and while they are generally safer than equities, returns are not guaranteed
Having Fixed income mutual funds in portfolio is great way of handling portfolio risks and cater your needs. But there are a lot of mutual funds you can pick and each of your need different fixed income mutual fund option. Let us discuss this in detail.
What is your purpose of investing Fixed income Mutual Funds?
If you are looking for fixed income mutual funds, it is likely that you are seeking stable returns because:
- You are getting started with investing in mutual funds.
- You are a conservative investor and cannot handle equity volatility.
- Your financial goal is less than one year away, and you want to avoid equity volatility.
- You have been investing in mutual funds for a long time to build wealth for retirement, and now it’s time to manage daily cash flows from fixed income mutual funds.
Types of fixed income mutual funds
There are several types of fixed income mutual funds to choose from, depending on your risk tolerance and investment goals:
| Category | Suitable for | Average Tenure of Bond/Debt Investments | Expected Returns | Examples of Fixed Income Mutual Funds |
|---|---|---|---|---|
| Liquid ETFs/Funds | Suitable for short-term investors looking for high liquidity and low risk | Up to 91 Days | 3% - 5% | LIQUIDBEES, LIQUIDIETF |
| Ultra-Short Term Funds | Ideal for investors whose investment tenure is less than 3 months to 6 months | 3-6 months | 4% - 6% | Nippon India Ultra Short Duration Fund, ICICI Prudential Ultra Short Term Fund |
| Short-Term Debt Funds | Ideal for conservative investors, these funds invest in short-term debt instruments and offer lower interest rate sensitivity | 1-3 years | 5% - 7% | ICICI Prudential Short Term Fund, HSBC Short Duration Fund |
| Gilt Funds | Gilt funds invest in government bonds and are considered low risk, but have high interest rate risks | 5-10 years | 6% - 8% | ICICI Prudential Gilt Fund, UTI Gilt Fund |
| Hybrid Conservative Funds | Suitable for conservative investors seeking moderate growth with a lower equity exposure | 3-5 years | 7% - 9% | HSBC Conservative Hybrid Fund, Parag Parikh Conservative Hybrid Fund |
| Hybrid Balanced Funds | Suitable for investors seeking a balance between equity and debt investments, with moderate risk | 3-5 years | 8% - 10% | HSBC Balanced Advantage Fund, Kotak Balanced Advantage Fund |
| Hybrid Aggressive Funds | Suitable for investors looking for higher returns with a greater focus on equity investments | 5-7 years | 10% - 12% | HSBC Aggressive Hybrid Fund, JM Aggressive Hybrid Fund |
Apart from the category of fixed income mutual fund options shown above, there are other debt fund categories like money market funds, long term funds, credit risk funds, Dynamic Bonds, Long Term Funds etc.
Disclaimer: Please note that the above list is for educational purposes only
How to invest in fixed income mutual funds?
As seen above there are variety of categories of fixed income mutual funds (debt funds) available, and we need to choose mutual fund to invest in based on our needs and investment tenure.
Let us answer this question in 2 ways,
- You know the risk you can take and you know how long you can stay invested.
- You want to get fixed income from your existing mutual fund investment, ex: 30,000 Rs passive income.
What fixed income mutual fund to invest in?
If,
Need/Purpose: Getting started to invest in mutual funds
Investment Tenure: 1-3 years
Risk: Low to Moderate
Then,
Fixed income mutual fund choice: Short-Term Debt Funds, Ultra Short-Term Debt Funds
If,
Need/Purpose: Just wanted to park money and completely avoid risk
Investment Tenure: Upto 91 days to 3-6 months
Risk: Very Low
Then,
Fixed income mutual fund choice: Liquid ETFs (e.g., LIQUIDBEES or LIQUIDETF), Ultra-Short Term Funds
If,
Need: Conservative long-term investor, risk-averse
Investment Tenure: 3-5 years
Risk: Moderate to Low
Then,
Fixed income mutual fund choice: Hybrid Funds (Balanced or Aggressive)
If,
Need: Experienced investor with long-term understanding
Investment Tenure: 5-10 years (for Gilt Funds)
Risk: Moderate to High
Then,
Fixed income mutual fund choice: Hybrid Funds, Gilt Funds
How to get 30,000Rs passive income from mutual funds?
To find how to generate ₹30,000 in passive income from mutual funds, we need to answers for below questions:
- How long do you want to receive this ₹30,000 passive income?
- What is the expected return on your mutual fund investment?
Personally, I don’t like the idea of depending on fixed income from long-term investment forever. We will discuss the reasons in separate blog.
However, for now, the table below shows how much you need to invest at different rates of return over periods ranging from 5 to 30 years to achieve a monthly income of ₹30,000.
| Investment Years | 6% Return | 7% Return | 8% Return | 9% Return |
|---|---|---|---|---|
| 5 | 15,51,766 | 15,15,059 | 14,79,553 | 14,45,201 |
| 10 | 27,02,203 | 25,83,790 | 24,72,644 | 23,68,250 |
| 15 | 35,55,105 | 33,37,678 | 31,39,217 | 29,57,802 |
| 20 | 41,87,423 | 38,69,475 | 35,86,628 | 33,34,348 |
| 25 | 46,56,205 | 42,44,607 | 38,86,935 | 35,74,848 |
| 30 | 50,03,748 | 45,09,227 | 40,88,504 | 37,28,455 |
For example, if I need ₹30,000 per month for the next 10 years, and I prefer to take low risk, I could consider investing in a combination of fixed income mutual funds. Based on the options discussed above,
- If I allocate 30% in short duration funds, 30% in Gilt Funds, and 40% in Conservative Hybrid Funds, expecting an 8% return, I would need ₹24.7 lakh invested.
- Alternatively, if I choose to invest 100% in short duration funds and expect a 7% return, I would need ₹25.8 lakh invested.
You can find the required amount of investment you need in the above table, if you know risk you are willing to take and how long you need that amount.
How to Invest in Mutual Funds?
Most of the discount brokers, and fintech platforms offer to invest in fixed income mutual funds discussed above.
- Login to Your Broker Account Open your broker’s website or app and login with your credentials.
- Navigate to the Mutual Funds Section Look for the “Mutual Funds” option on your dashboard or menu
- Choose Your Fund Based on Risk
- Low Risk: Choose debt funds, hybrid funds, or liquid funds if you’re a conservative investor.
- Medium Risk: You can choose for balanced or hybrid funds.
4. Decide Your Investment Amount & Frequency Based on your financial goals you can enter desired amount and chose Lumpsum or SIP.
If you don’t have account, feel free to open account from below links.
Best Fixed Income Mutual Funds to Invest in 2024
For investors looking to invest in fixed income mutual funds in 2024, here’s a list of some of the top-performing funds:
| Category | Fund Name | AUM (₹ Crores) | 3Y CAGR (%) | Expense Ratio (%) |
|---|---|---|---|---|
| Aggressive Hybrid Fund | JM Aggressive Hybrid Fund | ₹678.92 Crores | 24.84% | 0.57% |
| ICICI Pru Equity & Debt Fund | ₹40,203.38 Crores | 20.79% | 0.98% | |
| Conservative Hybrid Fund | Bank of India Conservative Hybrid Fund | ₹66.46 Crores | 14.10% | 1.10% |
| Kotak Debt Hybrid Fund | ₹2,999.05 Crores | 11.51% | 0.45% | |
| Short Duration Fund | ICICI Pru Short Term Fund | ₹19,922.45 Crores | 7.22% | 0.45% |
| Aditya Birla SL Short Term Fund | ₹8,923.74 Crores | 6.96% | 0.38% | |
| Ultra Short Duration Fund | Nippon India Ultra Short Duration Fund | ₹7,914.34 Crores | 6.93% | 0.38% |
| LIC MF Ultra Short Duration Fund | ₹246.19 Crores | 6.05% | 0.25% | |
| Gilt - Long Term Fund | SBI Magnum Constant Maturity Fund | ₹1,762.06 Crores | 6.08% | 0.31% |
| ICICI Pru Constant Maturity Gilt Fund | ₹2,442.45 Crores | 5.90% | 0.23% |
These funds cater to different risk profiles and investment horizons, making it essential to choose based on your financial goals.
Mutual Fund Taxation
Understanding mutual fund taxation is crucial for planning your returns:
- Short-Term Capital Gains (STCG): If you sell your fixed income mutual funds within 3 years of investment, the gains are taxed at your income tax slab rate.
- Long-Term Capital Gains (LTCG): For investments held for more than three years, LTCG is taxed at 12.5% without indexation benefits. The tax rate is reduced to 10% with indexation.
It’s important to keep an eye on changes in mutual fund taxation policies.
Risks of Investing in Fixed Income Mutual Funds
Despite their stability, fixed income mutual funds carry below risks:
- Interest Rate Risk: Rising interest rates can reduce the value of the bonds held by the fund, lowering the NAV (Net Asset Value).
- Credit Risk: The risk of default by issuers of the bonds in the fund. Higher credit risk can mean higher returns but also greater chances of loss.
How to Maximize Your Returns from Fixed Income Mutual Funds
To optimize your returns in fixed income mutual funds, consider the following tips:
- Diversify: Include a mix of short-term and long-term funds in your portfolio.
- Stay Informed: Track interest rate trends, as they affect bond prices and, ultimately, fund returns.
- Tax Planning: Invest for the long term to benefit from lower tax rates on long-term capital gains.
- Expense Ratios: Compare the expense ratios of different funds, as lower fees will leave you with more returns.
Conclusion
Fixed income mutual funds are great option for investors who are looking for steady returns with relatively lower risk. Whether you’re planning for the future, saving for a major purchase, or building a diversified portfolio, these funds can play a key role in your wealth-building strategy.
Be sure to stay informed about the best mutual funds to invest in 2024, the tax implications, and how to invest in mutual funds to maximize your returns.
By understanding the types of funds, risks, and the process of investing, you can take control of your financial future. With the right approach and a long-term strategy, fixed income mutual funds offer a reliable pathway to wealth accumulation.
All the information shared is for educational purposes only. The blog Finance Made Easy(financemadeeasy.in) and the author is not responsible for your financial decisions.
