Fixed Income Funds

There are a number of different types of income-producing funds, each with its own characteristics and level of risk.

Government
These funds typically invest in bonds issued by sovereign governments and government agencies authorized to issue debt, such as Fannie Mae and Freddie Mac, and international agencies, such as the World Bank and International Monetary Fund.

Municipal Bonds
Municipal bonds are issued by state and local governments in the U.S. in addition to other public authorities, such as school districts. Generally speaking, interest on municipal bonds is exempt from federal income taxes. In some states, interest on bonds issued by that state and the municipalities within it are also exempt from that state’s income taxes.

Corporate Credit
These funds typically invest in bonds, preferred stocks, and other types of fixed-income instruments representing debt issued by private corporations. Corporate bonds tend to be more risky than bonds issued by governments and carry various credit risks depending on the individual issuer. As a result, however, they may offer potentially higher income opportunities.

Multi-Sector
These funds typically invest in a variety of fixed-income instruments, including a mix of government and corporate bonds. This provides investors with an additional level of diversification across both credit risk and price.

Securitized
Asset-backed securities are collateralized by loans that provide an income stream comprised of both principal and interest on the securities. Loans backing these securities include residential and commercial mortgages, automobile loans, credit cards, and other types of financial assets.

Bank Loans
These represent participation in loans to private corporations underwritten by commercial banks, including first lien, second lien, and collateralized loan obligations. Bank loans tend to be more risky than corporate bonds but, as a result, can potentially offer higher interest rates.

Currencies
These funds typically invest in money market instruments and forward currency contracts denominated in the currencies of foreign countries. In addition to carrying credit risk, these funds carry currency fluctuation risk.

Sukuk
Sukuk funds are vehicles that typically invest in debt instruments structured to comply with Islamic law and its investment principles. Historically, sukuk bonds offer less volatility and more downside protection than conventional bonds. They have also grown in size and diversity over the past several years.

What Is Fixed Income Compared to Bond Funds?

Fixed income typically refers to a type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. 

Investors traditionally equate bonds with fixed income however there are various types of fixed income instruments including preferred securities, treasury bills, certificates of deposit, guaranteed investment certificates, and mortgage backed securities.

In comparison, bond mutual funds invest primarily in individual bonds. Typically they make periodic dividend payments based on the interest paid by the bonds held in the fund.