Fixed income funds are simply known as mutual funds that means you invest in fixed income securities such as corporate bonds and municipal bonds that are for long-term investment and US treasuries that are short-term investments. In this type of funds, profit is distributed on fixed schedules. But the payment amount can vary or can be zero. They are known as the best potential income generation funds that can increase your wealth.
There are many types of fixed-income funds and every type has its own characteristics and level of risk. You need to learn them first and then invest to get most out of them.
1. Municipal Bonds
Municipal funds are the bonds that are issued by states and cities government that are all tax-free at the federal level and also tax-free if the bond is issued and purchase from the same city or state of residence. For the investors of New York, California, Massachusetts, and few other states, they can get benefit to invest in double tax-free municipal bonds.
2. Corporate Funds
These type of funds are the ones that invest in preferred stocks, bonds, and some other fixed-income funds that are issued by the private corporations. Corporate bonds are more risky than other type of funds and also includes credit risks that depends on the issuer. However, they also offer high income opportunity as well.
3. Government
These type of funds are investment in bonds that are issued by the government agencies and sovereign government to issue debt. The agencies include Freddie Mac, Fannie Mae, and some other international agencies like World Bank.
There are many other types, the main ones are explained above. Now lets have a look at the risks associated with Fixed-income funds:
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Risks Associated With Fixed-income Funds
Four type of risks are involved in fixed-income and you must need to know them before doing any investment. The risks are:
- Liquidity risk: It is a risk of chance that the holder might want to sell his fixed-income assets but he was unable to find the buyer for it.
- Inflation risk: It is the second source of risk that means if the rate of inflation outpaces the fixed income amount, the investor may loss the purchasing power.
- Interest rate risk: It is inverse to the bond value. The higher the interest rate, the lower the bond value gets and vice verse. Price volatility in the market is caused due to interest rate movement.
- Credit risk: It is also known as financial risk. If the investor invest in corporate bonds, they take the credit risk as well as interest rate risk. It means there is a possibility that the issuer can default on its debt obligation that can result in investor will not get full amount of his investment.
Benefits of Fixed-income Funds
- Income generation: With fixed-income funds, you can get a steady good income continuously. The investors get fixed amount of income regularly on their bonds as coupon payments. The income you generate is exempt from all taxes.
- You can take higher returns only if you can take more credit risks and interest rate risk.
- Fixed-income funds are less sensitive to macroeconomic risk like economy downtimes. They generate you reliable income without.
