Fixed Income Funds (FIFs)

Fixed-income funds (FIFs) are investment funds that mainly invest in a diversified portfolio of fixed-income securities such as corporate and government bonds and mortgages that are backed with securities. Funds earn income for the investors through interest from the bonds in the portfolio. The funds are appropriate for investors who wish to obtain considerable current income levels and steady capital growth. It is suitable for investors who primarily want to preserve their capital while at the same time, generating regular interest from such capital. The funds also guarantee the safety of the principal amount invested.

Key features of fixed-income funds

Diversification – FIFs offer investors diversification across various fixed-income securities. With a diversified portfolio of bonds, investors reduce the impact of credit events or defaults from individual bonds on the performance of the entire fund.

Liquidity – FIFs have varying levels of liquidity depending on the underlying securities that the FIF companies have invested in. Some bonds such as corporate and municipal bonds have limited liquidity while others have high liquidity because they actively trade in the secondary market.

Income generation – FIFs are primarily aimed at generating income for investors. The income arises from interest payments that issuers the bonds held in the FIFs portfolio. The investors receive the interest in the form of dividends.

Risk and returns – FIFs have a variable risk profile depending on factors such as the type of bonds held, their credit quality, their maturity, and the prevailing market conditions. Bonds with higher yields or lower credit ratings have higher risks but might have higher returns and those with lower yields and higher credit ratings might have lower risks and potentially lower returns.

Sensitivity to interest rate – Fixed-income securities are sensitive to interest rate changes. A rise in interest rate lowers the bond prices while a fall in interest rate increases bond prices. Interest sensitivity rate is also known as duration risk and changes depending on the coupon rate and maturity of the bonds held in the fund portfolio.

Overall, fixed-income funds are most suitable for investors who need to preserve capital, diversify from capital investments, and wish to earn a steady income. However, investors should carefully evaluate their risk tolerance, time horizon, and investment objectives before investing in the funds. They should also consider consulting financial specialists and advisors to for personalized guidance.