What are Fixed-Income Mutual Funds?

What are Fixed Income Mutual Funds?

Mutual funds are investments that allow a pool of investors to combine their money and have it managed by a professional manager. Mutual funds are typically longer-term investments which may have higher fees than other types of investments.

Depending on the fund, you may end up paying a management fee for the manager to manage the funds, as well as load fees when you buy or sales fees when you choose to sell the fund. You should read the prospectus carefully to determine what fees you will be charged before investing in any  mutual fund.


Fixed income mutual funds are mutual funds that own fixed-income securities such as municipal bonds, corporate bonds, treasury bonds, preferred stocks, dividend paying stocks, real estate and money market instruments.

There are advantages and disadvantages associated with fixed income funds over traditional mutual funds. The main advantage is a steady income stream that can be then reinvested back into the fund.


There are five basic types of fixed-income mutual funds.

Treasury-Inflation Protected Securities (TIPS) Fixed Income Funds

Tips funds are funds that provide some protection against inflation by investing in TIPS bonds. TIPS bonds adjust the interest and principal on a semi-annual basis to keep pace with inflation or deflation based upon the consumer price index (CPI). Upon maturity, the principal paid is the higher of the adjusted principal or the original principal.

Municipal Fixed Income Funds

Municipal fixed income funds hold a basket of municipal bonds. Municipal bonds, also called “munis,” are issued by city, county, and state governments to help finance their operations and bridge the gap of budget shortfalls. Generally, munis are exempt from federal taxes, and in some instances state taxes —if you purchase them in the state which you reside.

Investment Grade Corporate Fixed Income Funds

Investment grade corporate fixed income funds only invest in securities that are considered investment grade. Bond rating firms, such as Standard and Poor’s (S&P) and Moody’s, use a letter scale (upper and lower case) to rate a bond’s creditworthiness on a scale from D (lowest) to AAA (highest). Bonds that are considered investment grade have a rating of BBB (S&P) and Baa (Moody’s) and higher.

High-Yield Fixed Income Bond Funds

High-yield fixed income bond funds buy high-yield bonds. Often referred to as “Junk Bonds,” high-yield bonds are corporate-issued bonds with ratings below that of investment grade. As their name suggests, high-yield bonds typically have higher yields than investment grade or municipal bond. But as indicated by their lower credit rating, they also carry higher inherent risk as well.

International Fixed Income Funds

Typically, a “currency play,” international fixed income bond funds aim to take advantage of fluctuating U.S. dollar by purchasing bonds issued in a foreign currency that is expected to appreciate or depreciate against it.


There are many things to consider when deciding on whether or not fixed income mutual funds are right for you. As with any investment, it is important to know the risks and potential rewards involved and weigh them against your overall investment goals. A qualified professional can help guide you in the right direction.

You should carefully review the prospectus of each fund prior to investing. It is your responsibility to understand the investment prior to placing any money in a mutual fund. Many funds hold a variety of securities regardless of what the name of the fund is. You should also understand the cost associated with the mutual fund prior to making the investment.