What are Fixed Income Mutual Funds?

When we hear about investing in Mutual Funds, the first impression is that they invest in stocks. However, not all Mutual Funds invest in stocks, such as Fixed income Mutual Funds.

Fixed income refers to income from investments like regular interest Fixed Income Mutual Funds, also broadly known as Debt Mutual Funds. These funds provide potentially stable returns with less risk than equity/equity oriented mutual funds.

Why Invest in Fixed Income Mutual Funds?

• Less Volatile: Invests in bonds and money market instruments*, offering reduced volatility and lower risk compared to equity funds. Since the fund invests in fixed income securities there is visibility of the income to be earned by the fund giving it more stability.
  *Money market instruments are certificates of deposit, treasury bills, etc.
• Stable Return Potential: Aims for better yields than traditional savings by investing in diverse bonds and fixed-income securities.
• Easy Liquidity: allow for liquidation, particularly during urgent financial situations as they don’t have any lock-in period
• Tax Efficiency: Tax is due only when you sell or redeem the fund, unlike traditional savings instruments where may have to pay tax on interest income every year.
• Diversified Portfolio: Spread risk across a range of fixed-income securities.
• Professional Management: Managed by experts who aim to optimize returns while managing risk.

What are the different types of Fixed Income Mutual Funds?

• Overnight Funds: Investment in overnight securities having maturity of 1 day
• Liquid Funds: Investment in Debt and money market securities with maturity of upto 91 days. For short-term goals (7 - 91 days).
• Low Duration Funds: Ideal for 3 – 12 months investment.
• Medium Duration Funds: Ideal for 3 – 4 years investment.
• Long Duration Funds: Ideal for investments above 7 years.

Who are fixed income mutual funds suitable for?

• Emergency Savers: Saving money for emergency situations for lower risk and easy liquidity.
• Diversifiers: Looking to balance and broaden their investment portfolio.
• Alternative Seekers: Searching for options beyond saving in an savings account for a lower return.
• Income Hunters: Aiming for regular income streams.
• Stability Lovers: Preferring low volatility in their investments.
• First-Timers: New investors seeking a stable entry into mutual funds.
• Short-Term Goals Planners: Planning for short term goals by investing in funds with lower risk and a predictable return.

Systematic Withdrawal Plan (SWP)

A Systematic Withdrawal Plan (SWP) allows mutual fund investors to withdraw a pre-determined amount of money at specific intervals from their investment, aiming to offer a steady cash flow. Unlike a Systematic Investment Plan (SIP), where small, periodic investments help build wealth over time, an SWP involves gradually redeeming either a fixed amount, a specific number of units, or only returns above a certain base level. For example, investing ₹10 lakhs in a debt fund and setting ₹10,000 as a monthly withdrawal ensures regular cashflow until the corpus is depleted. This feature is particularly beneficial for retirees or anyone seeking a structured withdrawal plan while keeping the remaining investment intact and growing.

Here's how SWP works:

Investors, particularly retirees, often use a Systematic Withdrawal Plan (SWP) to generate regular cash flow from their mutual fund investments. It offers a structured and disciplined approach to withdrawing funds, ensuring consistent cash flow while allowing the remaining investment to potentially grow. Since the tax treatment of SWP withdrawals depends on the type of schemes and the investor's tax bracket, it is essential to consider the tax implications and any applicable exit loads before setting up an SWP.