Fixed Income Mutual Funds In India: Benefits, Returns And Smart Alternatives
Indian investors have often shown a greater affinity towards fixed-income generating investment options. For instance, according to a 2024 RBI survey, 95% of Indian families rely on fixed deposits for capital appreciation1. Therefore, market-linked investment avenues like mutual funds have often pushed away traditional investors.
In such a scenario, unlike regular mutual funds, the fixed-income mutual funds aim to provide consistent returns, higher than fixed deposits. They strive to address the stability requirement of certain investors while providing higher capital appreciation.
Understanding the meaning and other attributes of this investment option can help gauge the source of its predictable and stable returns.
What Are Fixed-Income Mutual Funds?
Mutual funds are financial entities that combine the capital of several individuals and create a pool that gets invested in various equity or debt-related assets. The returns are distributed among the individual investors called unitholders.
Fixed-income mutual funds represent a specialized segment of the mutual fund universe. This section delves into their features, benefits, and role in a diversified portfolio.
Fixed Income Mutual Funds : Meaning And Core Features
A category of mutual funds that invest in fixed-income generating assets like debt securities and money market instruments, in a bid to provide fixed returns to its investors, is called a fixed-income mutual fund.
As per SEBI guidelines, fixed income mutual funds must have at least 80% of their corpus invested in fixed-income generating securities2.
Some key features of fixed income funds are listed below.
1. Fixed income generation: These mutual funds provide consistent returns to their investors through interest payments and capital appreciation. This feature is attractive primarily to investors who seek earnings that are steady and dependable.
2. Diversified portfolio: Fixed income mutual funds invest their corpus into fixed-income generating assets, like debt securities and money market securities. The choice of such assets enables these mutual funds to deliver stable returns.
For instance, the table below shows some assets held by HDFC fixed income mutual funds.
| COMPANY | ALLOCATION |
| 7.18% GOI MAT 240737 | 20% |
| 7.41% GOI MAT 191236 | 11.97% |
| NTPC Limited | 2.95% |
| India Grid Trust | 2.6% |
3. Lower market volatility: Since the fixed income mutual funds invest mostly in debt and money market instruments, they reduce the impact of market volatility on their returns. Although every investment avenue has a degree of risk associated with it, the features of mutual funds in this case are such that the degree of volatility is less than market-linked securities.
4. Professional fund managers: Like all mutual funds, professional fund managers oversee fixed-income mutual funds. They either try to emulate the market benchmark or surpass it, depending on the nature of the mutual fund. Professional management ensures better capital allocation, resulting in optimum returns.
5. Taxation: Mutual fund investments are taxed only if the units are redeemed. If the units are sold within 24 months, there is a short-term capital gains tax3. In all other cases, a long-term capital gains tax is levied. The LTCG tax rate is 12.5%. Regarding STCG, taxes are assessed following the relevant tax rates.
| Particulars | Timeframe | Tax rate |
| STCG | Units held for less than 24 months | Applicable tax slab |
| LTCG | Other than the STCG timeframe | 12.5% |
The understanding of fixed-income mutual funds is incomplete without understanding their differences from equity-linked mutual funds.
Fixed-Income Mutual Funds VS Equity Mutual Funds
There are multiple mutual fund investment ideas available to investors. The two most prominent options that are complete antithesis to one another are the fixed-income mutual funds and equity mutual funds.
The distinction between equity and fixed-income mutual funds is displayed in the table below.
| Parameter | Fixed Income Mutual Funds | Equity Mutual funds |
| Definition | Mutual funds that include fixed-income generating securities in their portfolio are called Fixed-income mutual funds. | Mutual funds that invest in market-linked securities like company stocks are called equity market funds. |
| Objective | The primary objective is to provide consistent returns. | The main goal is to maximise profits. |
| Portfolio | The mutual fund makes investments in money market and debt securities, like treasury bills and bonds in India. | These mutual funds invest in market-linked securities like stocks and equities. |
| Return Potential | They provide lower but consistent returns. | They provide higher returns than fixed-income mutual funds. |
| Market sensitive | These investment options are less susceptible to market volatility. | These investment options are highly susceptible to market volatility due to their equity-linked securities. |
| Nature of investors | Suitable for conservative investors or investors looking for consistent returns. | Suitable for investors with an adequate risk appetite looking for maximisation of returns. |
Who Should Invest In Fixed-Income Mutual Funds?
The success of an investment depends on choosing the optimum investment option. The attributes of an asset must match the fiscal temperament and objectives of investors.
For instance, if a risk-averse investor above 60 years of age invests 80% of his investment corpus into equity, he might not be able to fulfil his objective of stable income generation.
Therefore, listed below are the nature and categories of investors that might invest in fixed-income mutual funds.
1. Investors who want passive income: If an investor is looking for passive income generation, they might look at fixed-income mutual funds because they provide potential fixed and stable income.
2. Investors who want risk reduction: Fixed income mutual funds invest in debt and money market securities. Money market securities are usually issued by the government and therefore have a sovereign guarantee. Debt securities enjoy capital repayment before equity in the case of dissolution.
3. Conservative investors: Traditional investors who prioritise stability over investment might choose fixed-income mutual funds because they provide stable returns derived from fixed-income securities.
4. Investors looking for portfolio diversification: The fixed-income generating mutual fund might provide a strong foundation for a portfolio. The risk generated from equity investment can be mitigated through assets that are not related to markets.
Investors whose temperament and objectives match the attributes of these mutual fund investments might choose this avenue. However, before investing, it is necessary to understand the nuances involved in their functioning.
How Do Fixed Income Mutual Funds Work?
Professional fund managers select the fixed income assets that are utilised by the fixed income mutual funds. Through interest and capital gains, they give their investors financial appreciation.
Let us understand each aspect in detail.
Underlying Assets: Bonds, Debentures, Government Securities
A closer look at the details of some common assets held in the portfolios of fixed-income mutual funds can aid optimal decision-making.
The three broad categorisations of securities are listed and discussed below.
1. Bonds: Bonds are fixed-income financial products. They are a type of credit extended from an investor to a borrower. The bond market in India is valued at USD 2.69 trillion as of December 20244. The chart below shows the two major categories of bond investment in India.
2. Debentures: Like bonds, companies can issue debentures, which are a form of long-term financial instrument. Investors of debentures become the creditors of the issuer and the corpus collected through debentures is treated as a debt. Debentures are often unsecured and the reputation of the company acts as an indicator to its creditworthiness.
With India's GDP expected to reach USD 7-8 trillion in the next five years, corporate bonds and debentures are emerging as a key component of capital formation5.
3. Government securities: Other than government bonds and debentures, fixed-income securities often invest in other government-issued assets. A major category of this asset is money market instruments. They are low-risk, short-term financial products that mature in less than a year.
For instance, a 180-day Treasury bill of INR 100 may be issued at say INR 96, that is, at a discount of say INR 4. The instrument would be redeemed at INR 100 at the end of 180 days.
Investors might simplify the process of how to invest in bonds, debentures and other government securities by investing in fixed income mutual funds because they optimise the investment by diversifying across different assets and providing optimum returns.
Interest Income vs Capital Gains: Key Differences For Investors
Returns can be generated from fixed-income mutual funds either through interest or capital gains. Let’s understand each component of the return generated in detail.
1. Interest: The mutual funds invest in bonds that pay interest. These interests are either distributed among the unitholders as returns or reinvested to increase the net asset value (NAV). The interest is consistent and predictable due to the regular return earned from the underlying asset.
2. Capital gains: Unitholders can redeem their investment and liquidate their units to generate capital gains. Moreover, if the market value of the underlying security, such as a bond, increases due to any change, say, a fall in market interest rate, the NAV of the mutual fund increases. Hence, investors will achieve capital appreciation when they liquidate their units.
For instance, suppose Mr A bought a unit of a fixed-income mutual fund XYZ when its NAV was INR 400. If the NAV increases to INR 450 and Mr A liquidates his investment, he would achieve capital appreciation.
How Fund Managers Shape Your Investment Portfolio
Fund managers are professionals who create a mutual fund portfolio. They monitor the fund’s performance and make adequate adjustments.
Some key measures followed by portfolio managers are listed below.
- They specify what the fund's goals are.
- They create an optimum diversified portfolio of different assets that suit their requirements.
- They analyse the market and closely monitor the changing market dynamics.
- They take effective measures to minimise losses and maximise gains.
Types Of Fixed Income Mutual Funds
In India, there are many kinds of mutual funds that generate fixed income. Some of them are listed below.
1. Long-term debt funds: The duration of these funds is often more than five years. There are several medium to long-term funds that exist in the market today6.
2. Short-term debt funds: Fixed income mutual funds that have a tenure which is less than that of long-term funds are called short-term funds. Moreover, some fixed-income funds mature within a day and are called overnight funds.
3. Floating rate funds: These mutual funds invest in debt securities that offer a floating rate of interest. The rate of interest is floating, which means it is susceptible to change depending on the Mumbai Interbank Offer Rate.
4. Money market funds: These mutual funds invest solely in money market instruments like treasury bills, cash management bills, etc.
5. Corporate bond funds: These fixed-income mutual funds invest solely in corporate bonds. It alludes to the bonds that businesses issue.
6. Gilt funds: These bonds invest in government securities with a maturity period of both long-term and short-term tenure. The securities can be issued by both the central and state governments.
The Top Fixed Income Mutual Funds In 2025
The best fixed-income mutual funds in India are listed below based on their 5-year return as of 9th May 2025.
| Fund Name | 5-Year Return (%) | Expense Ratio (%) |
| Bank of India Credit Risk Fund | 26.99 | 1.52 |
| Aditya Birla SL Medium Term Plan | 13.52 | 1.56 |
| Bank of India Short Term Income Fund | 10.21 | 1.05 |
| Aditya Birla SL Credit Risk Fund | 9.82 | 1.54 |
| Baroda BNP Paribas Credit Risk Fund | 9.77 | 1.60 |
| UTI Dynamic Bond Fund | 8.77 | 1.53 |
Advantages And Disadvantages Of Fixed Income Mutual Funds
Fixed-income mutual funds offer a range of benefits, including stable returns, lower risk compared to equities, and portfolio diversification.
Advantages of Fixed Income Mutual Funds:
1. Stable and predictable returns: These mutual funds offer consistent returns through interests that are distributed as dividends. Moreover, capital appreciation can also be achieved.
2. Diversification: The portfolio of fixed income mutual funds is diversified across different fixed income-generating assets. Moreover, investors can diversify their existing portfolio with fixed-income securities.
3. Professional management: Professional fund managers choose the assets and keep an eye on the performance of the fixed income mutual funds. They take corrective measures whenever necessary.
4. Liquidity: Mutual funds with fixed income are very liquid. They also have a substantially lower maturity period. Investors can liquidate their units whenever necessary.
Disadvantages of Fixed Income Mutual Funds:
1. Lower return potential: The return provided by fixed income mutual funds is lower than that of equity-linked securities.
2. Expense ratio: A portion of returns is also paid to the fund managers, which reduces the amount of return available for the investors.
3. Risks: Various risks affect the performance of the mutual fund. Some market-related risks also affect the securities directly or indirectly.
Risks Associated With Fixed Mutual Fund Investment
Like any investment medium, the fixed income mutual funds in India are also susceptible to certain risks. The section that follows discusses a few of these risks.
1. Interest rate risk: Fixed income mutual funds invest in securities that pay interest. The interest rate risk states that if the market interest rate increases, the existing securities become less attractive to investors. Therefore, there is a shift to the new securities, and the demand for existing bonds falls.
For instance, suppose bond A gives out an interest of 10%. However, new bonds that enter the market declare an interest of 15%. The investors will find the new bonds more attractive, resulting in a falling demand for existing bonds.
2. Credit risk: This is the most common category of risk associated with any debt instrument. This risk states that the underlying assets might default on their interest payment or principal repayments. This risk increases for assets that are not backed by assets.
Mitigation or minimisation of these risks requires optimum analysis of the assets before investment. Moreover, investors can also refer to the credit ratings assigned by various reputable agencies.
Fixed Income Mutual Funds vs Other Debt Options
Mutual funds with fixed income make investments in a range of debt products. However, investors can directly invest in these instruments as well through Grip Invest and other intermediaries. Some benefits of direct investment are listed below.
1. Yield: Investors can invest in assets that suit their investment needs. Individual investment might help in maximising returns. For instance, corporate bonds under Grip Invest can provide yield up to 14%.
2. Risk: Investors can gain greater control over the degree of risk availed. A variety of investors are served by mutual funds. Individual investment gives greater autonomy to investors.
It is important to note that portfolio building is important for successful investing. While an individually customised portfolio might be more profitable to experienced investors, new investors might gain valuable insights from fund managers associated with mutual funds.
Factors To Consider Before Choosing Fixed Income Mutual Funds
Regular returns generated by mutual funds, like the monthly income mutual fund, are advantageous to all investors. However, certain factors must be considered before investment.
1. Investment needs: Investors should consider the objectives they wish to achieve before investing in any security. The attributes of the security must match the goals.
2. Existing portfolio: The investor must consider the nature of assets in their portfolio. Over-reliance on any asset might reduce the efficiency of a portfolio.
3. Fund managers: A portfolio is managed completely by fund managers. Understand the experience and position of the fund managers before investing.
4. Performance: Understanding the ratios like Sharpe, Sortino, expense and others, along with the returns generated over time, is essential for successful investing. They can compare the performance with other mutual funds of the same category to gauge their profitability.
Conclusion
Fixed income mutual fund investments provide consistent returns by investing their corpus in fixed-return generating securities like bonds, debentures, etc. The assets are appropriate for investors seeking steady returns since they produce a consistent yield.
However, like all investment mediums, fixed income mutual funds are also susceptible to certain risks, like credit risk and interest risk. Understanding individual investor temperament, along with investment objectives, is necessary to optimise returns. Log-in to Grip Invest and explore fixed income opportunities tailored to your profile.
FAQs On Fixed Income Mutual Funds In India
1. Do fixed-income mutual funds pay interest?
Yes, fixed-income mutual funds pay interest to their investors. The mutual funds invest in bonds that pay interest. These interests are either distributed among the unitholders as returns or reinvested to increase the net asset value (NAV). The interest is consistent and predictable due to the regular return earned from the underlying asset.
2. Which is better Fixed Deposit or mutual fund?
Fixed deposit mutual funds often offer higher interest than fixed deposits. Moreover, investors can generate capital gains by liquidating their investment in these assets. However, the success of any investment depends on optimum portfolio allocation and diversification. This is decided by considering the individual needs and objectives of investors.
3. How much return does a fixed-income mutual fund give?
The return given by fixed-income mutual funds differs from one fund to another. These mutual funds provide consistent returns to their investors through interest payments and capital appreciation. This feature is attractive primarily to investors who want stable and predictable returns.
References:
1. The Economic Times, accessed from: https://economictimes.indiatimes.com/markets/time-for-india-to-get-the-investment-game-right/articleshow/110212604.cms
2. Mirae Asset Mutual Fund, accessed from: https://shorturl.at/mm01O
3. The Association of Mutual Funds In India, accessed from: https://www.amfiindia.com/investor-corner/knowledge-center/tax-corner.html
4. The Economic Times, accessed from: https://economictimes.indiatimes.com/markets/bonds/2-69-trillion-and-counting-how-indias-bond-market-is-powering-a-8t-future/articleshow/119401928.cms
5. The Economic Times, accessed from: https://economictimes.indiatimes.com/markets/bonds/2-69-trillion-and-counting-how-indias-bond-market-is-powering-a-8t-future/articleshow/119401928.cms
6. The Association of Mutual Funds In India, accessed from: https://www.amfiindia.com/investor-corner/knowledge-center/debt-fund.html
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