Fixed income instruments
Fixed income instruments are debt based instruments, such as, corporate & government bonds, corporate debt securities, and money market instruments, etc. that offer capital appreciation. These instruments include various categories of debt mutual funds, RBI bonds, Govt. backed sovereign gold bonds, company / corporate fixed deposits, etc. These provide a relatively low risk and reliable investment options.
Why debt mutual funds?
- A very reliable option to park idle cash for short term
- High probability to earn returns better than many bank savings accounts
- Help in acculumulating a contingency fund
- Highly liquid in nature and can be easily withdrawn anytime without any charges
- Short term goals of 6-12 months can be easily fulfilled
- Some duration funds also help in capital appreciation from 1.5-2 years' perspective
- A good mechanism to switch money into equity funds and vice versa
- Systematic Transfer Plan (STP) option to do a systematic investment in equity fund
- Systematic Withdrawal Plan (SWP) presents a good monthly payout option
- Indexation taxation benefit for holding more than 3 years
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Types of debt mutual funds
Debt mutual funds are also popularly known as fixed income funds. They invest in fixed income instruments such as corporate securities, government bonds, money market instruments, commercial paper, etc. Sometimes referred to as bond funds, they offer a reliable investment avenue to aid capital appreciation.
Depending on the duration of the tenure of the bond paper/debt instrument they hold, the debt mutual funds are categorised as follows:
Overnight funds, Liquid funds & Money Market funds – These are the safest debt instruments as their holdings have the shortest tenure of maturity. Very ideal option for short term goals of 3-6 months. Liquid funds have an exit load if redeemed within 7 days of investment unlike the other 2 in this category.
Ultra Short funds, Short Term funds & Low Duration funds – These are good investment options for accumulating a contingency fund corpus or if the investor horizon is from 6-12 months to 18 months.
Gilt funds, Corporate Bond funds, Income funds, Medium Term funds & Long Term funds – These are the debt fund which have maturity of more than 3 years and have their own pros and cons of investments. It is important to understand the interest rate cycle before entering into these schemes.
Credit Risk funds – As the name suggests these are schemes which invest into risky credit papers and hence offer a high rate of interest at the stake of defaul risk.
Fixed Maturity Plans (FMPs) & Capital Protection Oriented Funds (CPOFs) – These are closed ended schemes where there is a fixed maturity period for the investors to hold to realise capital appreciation.
Company/corporate fixed deposits
- Most NBFCs and HFCs offer such deposit schemes
- Offer higher rate of interest than most of the bank FDs
- The respective company lends the money to borrowers or uses in their business operations
- Premature withdrawal results in penalty charges
- There is no guarantee on the capital
- We, therefore, recommend only the top companies with a very rich pedigree of management
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