Now that you have a brief idea of what a fixed income fund is, let us move to the next stage and learn more about investing in such instruments.
Debt Fund
Debt fund is a type of fund that invests in fixed return financial instruments like corporate bonds, debentures, certificate of deposits and government securities. They do not invest in the volatile stock market and have more predictable returns, and hence are considered as having low risk. They also include various funds investing in short term, medium term and long term bonds. The four most common types of debt funds include:
General Debt Funds: General debt funds invest in different types of debt instruments, both government as well as private with a specific time period. These instruments usually take the form of Bonds, Certificate of Deposits and Debentures.
Monthly Income Plans: Also known as MIPs, these are funds that give out regular pay-outs. These payouts can be given out monthly, quarterly, semi-annually or annually. These funds normally invest a significant part of the capital in debt instruments while the remainder amount is invested in equity. This fund should not be confused with a post office monthly scheme as the pay-outs of an MIP can be skipped if the fund is not performing well.
Gilt Funds: this fund invests only in long-term government securities, such as government bonds. One important fact about these funds is that their rate of returns are not stable, for an average gilt fund it is 2.5% in 6 months then 16% in a year and maybe 9% in 5 years. Since their returns vary a lot, they are not a primary choice among investors.
Liquid funds: These funds invest in short-term debt instruments such as a certificate of deposits, treasury bills, term deposits etc. The maturity period of these instruments lies between 3 months to 6 months.
Exchange Traded Funds (ETFs)
These are index funds, here the index refers to the indices of the stock market, which implies that these funds are traded on the stock market of India (BSE and NSE). As an investor, you can buy as many units as you want without any restriction just like shares in a stock market on a day-to-day basis. One important difference between ETFs and any other type of index funds is that ETFs do not intend to outperform their corresponding index. They simply replicate the performance of the Index.Lately, the Indian government has formulated the Bharat 22 ETF, a fund which houses 22 public sector companies. It tracks the specially made S&P BSE Bharat 22 Index, managed by Asia Index Private Limited. Another important and popular fund of this type is ETF Gold.
Three benefits of ETFs:
- They offer a diversified investment portfolio
- The stocks in the indices are selected carefully by index providers and are rebalanced periodically
- Offers anytime liquidity through the exchanges
Money Market Funds
This fund invests only in money markets such as commercial papers, commercial bills, treasury bills certificate of deposit (CDs) and other instruments specified by RBI. These funds have a minimum lock-in period of 15 days. Until recently, the RBI regulated money market funds but they now come under SEBI. It aims to provide investors with low-risk returns and to invest in easily accessible cash and their equivalent assets.
The prominent feature which makes money markets unique is the high level of liquidity that they offer. It is easy to make money market trades across currencies, maturities, debt structure as well as credit risk, making it ideal for institutions seeking to borrow or invest for short term finance.
