4 Reasons to Invest in Fixed Income Funds

Mutual fund investors are always in look for diversification. That’s because mutual fund advisors always suggest investors to make sure that they spread their finances across different asset classes and industries. The beauty of mutual funds is that they give investors an opportunity to generate income from different sectors and industries through one unique investment. However, it is better to make a financial plan before going ahead with investment planning. Financial planning is the crux of money management. It gives investors a fair idea about how much money they need to invest in order to reach closer to their ultimate financial goal.

The financial goals of investors may vary depending on individual to individual. For example, someone might have ignored retirement planning in their youth and now might be aiming to build a retirement corpus. If this particular individual needs at least Rs. 25 lakhs to Rs. 30 lakhs as a retirement corpus but has only 10 to 15 years remaining before he/she retires, then this particular investors might need to look for an aggressive scheme that may hold the potential to offer them the desired capital appreciation within their investment horizon. This is why it is necessary for investors to keep realistic goals so that they are able to implement a feasible investment strategy to get to those goals.

However, just because you have lesser time in hand and you need to generate xyz amount of income in that particular period doesn’t mean that you can invest in an aggressive scheme and expect your investment objective to achieved. Remember that aggressive investment schemes are highly volatile in nature. And if you are investing in market linked schemes like mutual funds, there is a good chance of your portfolio incurring losses. This is why investors need to take calculative risk while investing in mutual funds. For this, it is essential for investors to determine their risk appetite first. A risk appetite is nothing but an investor’s ability to take a certain degree of risk with their finances and invest in a scheme and give themselves an opportunity to earn some capital appreciation in future.

There are various mutual fund categories, each of which carry a different risk profile. For example, equity mutual funds schemes generally carry a moderately high risk profile. A mutual fund may invest across multiple money market instruments depending on the nature of the scheme and the risk profile that it carries.

What are fixed income funds?

Fixed income funds, or debt funds as they are popularly known in India, are mutual funds that invest in fixed income securities like government bonds, corporate securities, call money, treasury bills, debentures, certificates of deposits, etc. While equity funds invest predominantly in equity related instruments, debt funds or fixed income funds invest in securities that are known to generate regular income.

Reasons to invest in fixed income funds

Here are 4 primary reasons to invest in fixed income funds:

1. Fixed income funds are ideal for meeting short term goals

While retirement planning is a long term goal and mutual funds like equity schemes or hybrid schemes may be a better option to achieve that goal, if you have some short term goals you can invest in fixed income funds to achieve those goals. Fixed income funds are ideal for meeting short term goals like planning a short vacation or renovating your home or for making the down payment of your new luxury car. If you have an investment horizon of three years or less, then fixed income fund investments might help you achieve your short term goals.

2. Fixed income funds can help build an emergency fund

Exigencies in life are always unplanned. If you come across one in your life and need a large amount of money to take care of the medical expenses, an emergency fund built using fixed income fund can help you with that. Fixed income funds like Liquid funds allows investors to withdraw or redeem their units at any point of time. Instant withdrawals means you can liquidate your funds at any point of time and use that money to handle financial emergencies with ease.

3. Carry moderate to low risk profile

Fixed income fund schemes generally carry a moderate risk profile. Hence, those investors who are looking to shift from conseravative investment avenues to mutual funds, but do not carry a large risk appetite to invest in aggressive schemes can consider investing in fixed income funds.

4. Can be used for STP

A Systematic Transfer Plan allows investors to transfer their money from a fixed income fund to an equity fund. This is a better investment option than making a lump sum investment. A fixed income fund can be used for parking the lumpsum investment amount. Depending on market volatility the fund house will gradually transfer the finances from fixed income fund to equity fund. Thus, investors can use fixed income fund to park their money.

These were 4 primary reasons one can consider investing in fixed income funds. However, investors should talk to their financial advisor and keep their investment objective in mind before making an investment decision.

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