Fixed Income Investments are those which provide Income by way Interest on periodical basis along with the Principal amount at the maturity. Seems well, as we get fixed assured Income and Capital Amount. But there exists invisible Risk. Assured Fixed Income Investments also one of the riskier Investments as the Investment Blocked at the Interest rate at you invested. Let me put it is this way with the example, Suppose you have made investment of Rs 10,000/- for a period of 5 Years at a fixed rate of Interest of 8% p.a.. After making the said investment, you will be getting assured interest Income along with the Principal Amount at the Maturity. Usually, interest rates in the markets move up/down based on several factors in the economy including Inflation etc.
What if, after making said investment, interest rates in the economy go up? Though you will be getting assured returns, you will not be getting Market rate of Return. You end up making negative return compared to market driven Benchmark. This situation can happen vice versa. So, to avoid those kinds of risks one can opt either FRB (Floating Rate Bonds) as one of the Investment tools, whose interest rates changes based on the benchmark rates indicated in the terms of the Bond like MIBOR or 10 Year benchmark Bond rate etc or also go for Debt Mutual Funds.
Are Debt Mutual Funds Risk Free? In the same way as explained above, Fund Managers of Fixed Income portfolio face risks associated with the movement of Interest rates in the economy. As these Fund Managers deal with Billions of Rupees of portfolio, Risk or Return associated with those Investments are also be in the same way. So, how these fund Managers make those Investments? What are the factors they will consider for making Investments? Are they not risky as compared to Fixed Deposits? Are some of the interesting questions which come to our mind.
Fixed income funds (Debt Funds) are of various types like Overnight Funds, Money Market Funds, Low Duration Funds, Benchmark Funds, Floating Rate Bond Funds, etc. Each fund is differing from other in making investments and risks associated with them. Funds like Money Market fund Invests in Money Market Investments like Commercial papers/Certificate of Deposits/Bonds with the Maturity of less than 1 year etc. So based on the type of the fund you can diversify your risk and return while making investments. These Fund houses will have experienced Research analysts and Fund Managers who run their portfolio based on Market scenario to get the optimum return on Investments. They churn the book frequently if they intend and they try to get maximum return out of the said investments. Each type of fund will have different type of Risk and Investment parameters. Based on those they make the investments and track the portfolio. Risk parameters like PVBP, Value at Risk (VaR), Modified Duration, Maturity Pattern of Portfolio, Rating of the Investments etc are considered.
So, why should I Invest? Though those are risker, to get better return than traditional Investments, one can allocate part of their portfolio to such kind of Funds as one of the diversification strategies.
How much Return will they give more? There are many funds with the different type of Investment pattern. The performance of the same can be accessed from various websites including such Fund houses, News and Research Websites like Grow, Money Control etc.
Disclaimer: All Mutual Funds are subjected to Market Risk and Read all terms and conditions carefully before making Investments.
Hope you understood and will start diversifying your pattern!!!