Understanding What is Fixed Income Mutual Funds

Fixed income mutual funds are investment products that are bought with an aim of earning a regular income with relatively low risk as compared to other types of mutual funds. Before jumping directly into this endeavor you might want to know the basics, get a feel for the benefits, and determine if this type of investment is for you.

What Are Fixed Income Mutual Funds?

 Fixed income mutual are those mutual fund investment vehicles whose objective of investing is directed towards bonds as well as other related securities such as treasury bills among others. The main objective of these funds is to generate steady income for investors mainly through income such as interest income and at the same time maintain the initial capital that was invested.

How Do Fixed Income Mutual Funds Work?

 If you invest in a fixed income mutual fund your money will be combined with the money of other investors and then invested in a number of fixed income securities. These may include:

• Government Bonds:They are mainly in the form of bonds floated in the international market; they are usually deemed to be having low risk as they are floated by the government.
• Corporate Bonds:Given by the companies, they have higher rates of returns but slightly higher risk involved in it.
• Municipal Bonds:Local government, with a feature that they can generate tax free income to the investors.
• Certificates of Deposit (CDs):Low-risk investments which never go beyond the agreed time and which are promised a fixed rate of return.
• Treasury Bills:Securities issued within the government market that has a maturity period of not more than one year.

 The use of the fund manager means that the fund is managed actively with the full intention of generating the most amount of income within the chosen risk premium. These returns are paid to investors through dividends in form of interest rate through monthly or quarterly basis.

 Advantages of the Fixed Income Mutual Funds

 Regular Income:

Fixed income mutual funds are suitable for retirees and anyone who wants a regular and fixed income.

 Lower Risk:

 Such funds are usually less associated with risks than equity funds, as the latter invest in debt instruments, which is less risky than equities.

 Diversification:

 These funds invest in many bond and other fixed-income securities and this has the effect of insulation against poor returns for any particular investment.

 Professional Management:

 One of the benefits of investing in mutual funds is that they are managed by professionals such as Fund Managers who exercise discretion in the purchase or acquisition of securities for the fund taking into consideration matters such as market conditions, credits ratings and trends in interest rates among other factors all in a bid to ensure that the investors benefit from professional management.

 Capital Preservation:

 Such funds are popular among the conservative investors because they seek to preserve the amount that is invested initially while providing some income.

Types of Fixed Income Mutual Funds

 Government Bond Funds:

 To invest mainly government securities which are relatively safe and dependable in terms of yield.

 Corporate Bond Funds:

 Major on corporate bonds – Corporate bonds are bonds issued by corporations with an aim of raising capital for their operations. These funds give more return, but with relatively higher risk than government bonds’ investment.

 Short-Term Bond Funds:

 Fix in shorter maturities bonds of less than three years or money market funds which are much less sensitive to fluctuations in interest rates.

 Long-Term Bond Funds:

 It is better to go for bonds with longer time to maturity, they tender higher returns but are more sensitive to movements in interest rates.

 High-Yield Bond Funds:

 Holding of lower grade bonds with better yields; this are bonds that default more often and are thus more risky for investors.

Who Should Invest in Fixed Income Mutual Funds?

 Fixed income mutual funds are suitable for investors who:

 Seek Stability: Such funds are useful for investors who seek to avoid risks and maintain capital by all means.

 Desire Regular Income: Thus, fixed interest income will be useful for retirees or people who require a stable cash inflow.

 Are Conservative Investors: Those who want to invest in funds that have relatively less risk and are looking at more of a long-term return of their investment than earning a lot of profit in a year will appreciate these funds.

 Want Diversification: Holding fixed income mutual fund in a portfolio assist in offsetting risk especially if one has invested mostly in equities.

 Risks to Consider

 While fixed income mutual funds are generally safer than equity funds, they are not without risks:

 Interest Rate Risk: When bond prices rise – interest rates fall and vice versa. Fluctuations in interest rates are also one of the risks of this fund since prices of bonds can drop causing the value of the fund to drop as well.

 Credit Risk: There is always a risk that a bond issuer will default which will prove costly for the fund and particularly if it is investing in corporate or high-yield bond funds.

 Inflation Risk: Prices of bonds may not be able to grow at the same rate with inflation which could lead to decline of purchasing power of the money invested.

 These markets give an investment opportunity with fixed income but with lower risk than equity markets are known by fixed income mutual funds. In any case whether one is preparing for retirement, in need of regular income or planning to diversify investment portfolio, fixed income mutual funds can prove useful for the investor. Of course, as always, it is required to evaluate the potential investment objective, the client’s tolerance to risk, and time horizon.