Smart Investment Options: Fixed Income Mutual Funds

Fixed income funds, popularly known as debt funds are a mutual fund category. These mutual funds invest in securities whose nature is to generate regular income. Debt schemes generally invest in money market instruments like company fixed deposits, debentures, call money, government bonds, corporate securities, certificate of deposits, etc.

Here’s why fixed income mutual funds are a smart investment option:

Fixed income funds are far more liquid than conservative schemes

Fixed income funds are liquid in nature. This means that you can redeem your fixed income fund units at any point of time and the money is immediately transferred to your registered savings account the following day. This makes liquid funds a feasible investment option even for those who want to have lump sum cash sitting idle and want to park their money. This might help them accrue some interest till the time the money is invested and they can liquidate the fixed income fund scheme in case they need the money. In case you do not need the entire investment amount, you can also redeem a certain number of units. The option of partial withdrawal is no less than a blessing as one can continue investing without having to break the entire investment amount.

Fixed income funds offer multiple investment options

If you are keen on investing in fixed income funds, you need to know that there are two ways to make an investment in these funds. Investors can make a lump sum investment or they can opt for the SIP option. A lump sum investment is where an individual pays the entire investment amount right at the beginning of the investment cycle. Such an investment might be ideal for anyone who has surplus cash sitting idle and feels the need to park it somewhere. Investors who make a lump sum investment are allotted more units in quantum with the investment amount and depending on the fund’s existing NAV. 

A Systematic Investment Plan on the other hand is an easy and convenient way to invest in fixed income funds. One can invest small investment amounts and do not need to have a large surplus to start an SIP investment. Investors can invest in fixed income funds via SIP from the comfort of their home or office. All they need is a laptop or a smartphone with an average internet connection and they can start investing in fixed income funds. However, one needs to be KYC (Know Your Customer) compliant for making starting a fixed income fund SIP. With SIP, all an individual has to do is complete a one time mandate with their bank following which every month on a fixed date, a predetermined amount is debited from their savings accounts and electronically transferred to the fixed income fund. In the long run, an SIP might turn these small investment amounts into a decent corpus, thanks to the power of compounding.

Fixed income funds do not have a lock in period

Fixed income funds are apt for those who are looking to build an emergency fund, simply because they do not have any lock-in period. There are some equity funds like ELSS which come with a three year predetermined lock-in period. This means that one cannot withdraw or redeem their ELSS fund units till the lock-in period is over. But with fixed income funds, investors can withdraw their mutual fund units anytime and they receive the amount the next day in the registered savings account. That’s because fixed income funds do not have a lock-in period. They offer great liquidity to an investor’s mutual fund portfolio. One can also use fixed income funds to build an emergency fund so that they can tackle life's exigencies flawlessly.

Now it is true that fixed income mutual funds are a smart investment option, however here are some things that investors should keep in mind before investing in these funds:

Investment objective: The investment objective of an individual should align with that of the fund they are investing in. This is essential if one has to stand a chance of getting close to their financial goals. We invest so that we are able to achieve some goals to which we are emotionally attached. Hence, investors should only consider investing in a fund who shares the same investment objective as theirs.

Risk appetite: A risk appetite is an individual’s ability to invest in a scheme that carries a certain degree of risk which the hope of fetching some capital appreciation out of that investment. Now every mutual fund scheme carries a different risk profile and this is why investors should determine their risk appetite before investing in a fixed income fund.

Apart from this, investors should also do a background check of the fund and see if the fund has been consistent with providing capital appreciation over the years. They should also consider their financial advisor, who might be able to help them take an informed investment decision.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.