What Consists a Fixed Income Fund?

Unlike stocks and equity funds, fixed income funds have “fixed rates” of interests or returns.  It is a type of mutual fund (MF) or unit investment trust fund (UITF) which is basically a pool of money that is invested in different types of fixed income securities.

The good thing about fixed income fund products is that they offer sureball, more convenient and more affordable ways of investing money in various fixed income securities in just one fund to satisfy different short-term to medium term financial goals like purchasing a car, a new house, or for a dream travel.

Remember our previous article about mutual funds and UITF’s? For short-term and medium-term financial goals (5 years or less), the best fund to invest in are the fixed income funds. But are you familiar about the different financial instruments that fixed income fund managers are investing in?

What Composes a Fixed Income Fund?

Fixed income securities are fixed interest-bearing financial instruments and have a certain term or period of maturity. Most fixed income securities are subject to withholding taxes. Here are some examples of fixed income securities that mutual funds or UITF’s are investing in for their fixed income fund investment products.

1) Short-term time deposits – Time deposits are one of the most popular “investment” vehicles among OFW’s and even for those based in the Philippines who either have not been exposed to other types of higher earning financial instruments or whose investor profiles are satisfied with investing in lesser risky and relatively smaller interest-bearing investments. Short-term TD’s have fixed investment terms of 1, 3, 6, or 9 months.

2) Long-term time deposits – Long-term TD’s have longer locked in period of 1 to 5 years. They also have higher interest rates as compared to short-term time deposit products. UITF’s of banks may also invest the pooled money in other banks’ time deposit products.

3) Special Deposit Accounts (SDA’s) – These are fixed-term deposits by banks and trust entities of Bangko Sentral ng Pilipinas-supervised financial institutions with the BSP. These deposits were introduced in November 1998 to expand the BSP’s toolkit for liquidity management. In April 2007, the BSP expanded the access to the SDA facility to allow trust entities of financial institutions under BSP supervision to deposit in the facility. In 2013, the Bangko Sentral issued a new rule restricting access to its special deposit account facility. The rule is meant to reduce the BSP’s huge interest expense, which has caused its losses over the past few years.  Only unit investment trust funds offered by banks will be allowed to make SDA placements.

4) Fixed Rate Treasury Notes (FXTN’s) – These are direct and unconditional obligations of the national government. They are issued by the Bureau of Treasury (BTr). They are interest bearing and carry a term of more than one year and can be traded in the secondary market before maturity. Fixed Rate Treasury Notes are considered one of the primest investment instruments in the market. They are safe, liquid and offer attractive returns to investors. FXTN’s are issued and sold at a price equal to be face value and are redeemed at maturity for the full face value of the instrument plus interest/coupon of the last period.


FAMI’s SALFIF (Save and Learn Fixed Income Fund) composition

5) Retail Government Bonds – The RTBs are part of the government’s savings mobilization program designed to make government securities available to retail investors. It is issued by the Republic of the Philippines through the Bureau of the Treasury (the “BTr”). Coupon Interest are paid quarterly unlike the regular Treasury Bonds which are paid semi-annually. Other government agencies like PAGIBIG or Home Development Mutual Fund issue their own retail bonds to raise funds. Some local government units sometimes also issue their own debt instruments to acquire funds for their municipalities or cities.

6) Corporate Bonds – Large private companies also issue debt instruments whenever they expand their business or if they have major projects that need further funding. Corporate Bonds are usually offered at a higher rate than any other types of bonds. It is recommended that we only invest in Corporate Bonds issued by the largest companies only to ensure maximum safety for your money. Examples of companies in the Philippines that regularly issue corporate bonds are Ayala Corporation, Energy Development Corporation, Globe Telecom, JG Summit Corporation, and others.

7) Treasury Bills – T-bills are fixed income instruments that mature in 1 year or less. These are basically short-term debt obligation of governments to the public.


BDO Peso Fixed Income Fund (UITF) composition

8) Other financial instruments with fixed interest rates and respective maturity periods.

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