For most investors, long-term fixed income planning begins with traditional FDs. But as we move into 2026, more investors are now shifting toward fixed-income mutual funds and individual bonds.
Studies show that retail bond transactions have surged from 1.2 lakh to 7.5 lakh in just the past three years. Also, investments in Income and Debt-Oriented Mutual Fund Schemes have grown 10%, reaching ₹19.51 lakh crore as of October 2025.
If you are also exploring these financial products, realise that both are built on the same foundation, that is, “debt instruments”, but function very differently. Read this article to first understand each product individually and then see a detailed Mutual Funds vs Bonds comparison.
What are Fixed Income Mutual Funds?
Fixed-income mutual funds are schemes that primarily invest in debt or fixed-income instruments. Usually, the securities they hold provide regular interest income, which is then distributed among investors (based on their unit holdings).
When doing long-term fixed income planning, several conservative investors prefer investing in fixed-income mutual funds as they may offer more stability and carry lower risk as compared to equity funds.
For a better understanding, let’s see how they work and their various types.
How Do Fixed-Income Mutual Funds Work?
Fixed-income mutual funds come in two different options – Growth and IDCW (Income Distribution Cum Capital Withdrawal). Investors choosing the IDCW option are eligible to receive regular monthly income from the scheme.
Be aware that when the mutual fund chooses to distribute interest income to investors, it is paid out as “dividends”, and the amount you receive depends on the “number of units you hold”.
For more clarity, let’s check out the complete working of fixed-income mutual funds in simple steps:
Step I: You Invest in the Fund
You put money into a fixed-income mutual fund through a lump sum or SIP. In return, you receive units of the fund. Your number of units determines your share in the fund.
Step II: The Fund Collects Money from All Investors
Your investment is pooled together with money from other investors. This forms a large corpus that the fund manager can deploy across debt instruments.
Step III: The Fund Manager Buys Fixed-Income Securities
The manager invests the pooled money in instruments such as (illustrative list):
- Government bonds
- Corporate bonds
- Treasury bills
- Certificates of deposit
- Commercial papers and other similar debt securities
These instruments pay interest to the fund at a fixed or pre-determined rate.
Step IV: The Fund Earns Interest
As time passes, the debt securities in the portfolio generate interest payments. This interest becomes the fund’s income. Additionally, the value of such holdings may also rise or fall due to market conditions, which affects the fund’s NAV (Net Asset Value).
Step V: Income Accumulates in the Fund
All interest earned is added to the fund’s total assets. The fund now decides what to do with this accumulated income:
| Option A: Growth Option | Option B: IDCW Option |
| Reinvest it back into the fund (Growth option) | Pay it out to investors as dividends (IDCW option) |
You receive dividends only if you choose the IDCW option.
Step VI: The Fund Declares Dividends
If the AMC decides to distribute income, it announces a dividend. Dividend amounts depend on:
- How much income the fund has generated
- The fund’s dividend policy
- Market conditions
- Regulatory guidelines
Always remember that dividends are neither guaranteed nor fixed.
Step VII: You Receive Monthly Income (Dividends)
If the fund declares monthly dividends and you hold the IDCW option, you receive a payout based on:
- Number of units you hold
- Dividend amount per unit announced by the fund
For example, let’s say you hold 1,000 units and the fund declares ₹0.10 per unit. Now, you receive ₹100 as a monthly dividend.
Types of Fixed-Income Mutual Funds
Fixed-income mutual funds are grouped by SEBI into specific categories based on:
- Where do they invest?
and
- How long do the underlying securities take to mature?
Such a categorisation allows you to better understand the risk, time horizon, and nature of each scheme. For your reference, below is a list of fixed-income mutual funds as per SEBI guidelines:
| Sr. No. | Category | What the Scheme Invests In |
| 1. | Overnight Fund | Securities that mature in 1 day. |
| 2. | Liquid Fund | Debt and money market securities that mature in up to 91 days. |
| 3. | Ultra Short Duration Fund | Debt instruments where the average duration is 3 to 6 months. |
| 4. | Low Duration Fund | Debt instruments where the average duration is 6 to 12 months. |
| 5. | Money Market Fund | Money market instruments that mature in up to 1 year. |
| 6. | Short Duration Fund | Debt instruments with an average duration of 1 to 3 years. |
| 7. | Medium Duration Fund | Debt instruments with an average duration of 3 to 4 years. |
| 8. | Medium to Long Duration Fund | Debt instruments with an average duration of 4 to 7 years. |
| 9. | Long Duration Fund | Debt instruments with an average duration of more than 7 years. |
| 10. | Dynamic Bond Fund | The manager can dynamically shift between short, medium, and long-term bonds as per market conditions. |
| 11. | Corporate Bond Fund | At least 80% in corporate bonds. |
| 12. | Credit Risk Fund | At least 65% in corporate bonds. |
| 13. | Banking and PSU Fund | At least 80% in debt of banks, PSUs, and public financial institutions. |
| 14. | Gilt Fund | At least 80% in government securities (across maturities). |
| 15. | Gilt Fund with 10-Year Constant Duration | At least 80% in government securities with a constant 10-year duration. |
| 16. | Floater Fund | At least 65% in floating rate instruments. |
What are Bond Investments 2026?
Till now, you must have understood that fixed-income mutual funds work by investing your money into “many different bonds”. But instead of going through a mutual fund, you can also buy these bonds yourself, either during their IPO (new issue) or later from the secondary market.
For those unaware, a bond is a fixed-income instrument issued by:
- The Government of India
- Public-sector undertakings (PSUs)
- Private companies
These entities issue bonds to raise money. When you buy a bond, you are lending your money to the issuer. In return:
- You receive interest, called the coupon, at a pre-determined rate.
and
- Your principal is repaid at the end of a defined period, known as the maturity.
Mutual Funds vs Bonds Comparison: How Do They Differ?
Both options are part of the fixed-income universe and safe investment options 2026. The difference is who manages the selection and how diversified your holdings are. For a better understanding, check out the mutual funds vs bonds comparison table below:
| Parameters | Fixed-Income Mutual Funds | Individual Bonds |
| What They Are |
|
|
| How You Earn |
|
|
| Who Manages the Investment |
|
|
| Diversification |
|
|
| Risk Level |
|
|
| Market Risk |
|
|
| Costs |
|
|
In Summary, Fixed-Income Mutual Funds are a Ready-Made Portfolio of Bonds
So now you know that a fixed-income mutual fund is a collection of different bonds managed for you, whereas a bond investment is when you purchase a specific bond yourself. The two serve similar purposes but work very differently. Some key differences are:
- Mutual funds offer diversification, while a single bond exposes you to one issuer.
- Funds are professionally managed, whereas bonds require your own selection and monitoring.
- Funds have an expense ratio, while bonds generally do not have ongoing costs.
- Mutual fund NAVs fluctuate daily, while a bond’s interest is pre-determined.
If you are looking to invest in AAA-rated, government, or other corporate bonds, you may visit the GoldenPi platform. Here you will find multiple options along with complete details like coupon rate, credit rating, and more. Also, investments can be made online without any branch visits.
Mutual Funds vs Bonds Comparison FAQs
Where to find bonds or mutual funds for stable returns in 2026?
You can explore platforms like GoldenPi for AAA-rated, government, PSU, and other corporate bonds. For mutual funds, you may visit AMC websites or trusted broker platforms.
How risky are fixed-income mutual funds?
They carry two main risks: interest rate risk and credit risk. Usually, bond prices move opposite to interest rates. So, when interest rates rise, bond prices fall, and the fund’s value (NAV) can decrease. Additionally, if a company or issuer delays or fails to repay, the fund can face losses.
What is the primary difference between fixed-income mutual funds and bonds?
A fixed-income mutual fund collects money from several investors and uses that pool to buy multiple bonds. When you buy a bond yourself, you invest in a single bond instead of a diversified basket.
________________________________________________________
Disclaimer:
This information is for general information purposes only. GoldenPi makes no guarantee on the accuracy of the data provided here; the information displayed is subject to change and is provided on an as-is basis. Nothing contained herein is intended to or shall be deemed to be investment advice, implied or otherwise. Investments in the securities market are subject to market risks. Read all the offer-related documents carefully before investing.
Bonds or non-convertible debentures (NCDs) are regulated by the Securities and Exchange Board of India and other government authorities. GoldenPi Securities Private Limited is a registered debt broker and acts as a distributor and not as a manufacturer of the product.
