Written by Ilham Indra, Marketing Communication at PT Korea Investment Management Indonesia. Reviewed by Compliance before publication.
The name contains the word "fixed", and that is where the confusion starts. What is fixed is the coupon, not the value of the investment.
What a Fixed Income Fund Is
A fixed income fund is a mutual fund that places most of its money in debt securities issued by governments or companies. Its value follows the prices of those securities, which move inversely to market interest rates.
Why Is It Called "Fixed Income"?
The term refers to the instruments it buys: debt securities pay a coupon set at issuance. The coupon is fixed.
An investor's value is not fixed. The prices of the bonds in the portfolio move daily, and that movement shows up in the net asset value per unit.
Why Does the Value Move?
Bond prices move inversely to market interest rates. When rates rise, older bonds paying lower coupons become less attractive and their prices fall. When rates fall, the reverse happens.
The longer the remaining maturity of the bonds held, the larger the effect of a rate change. A basic explanation of debt securities is available in our article on bonds.
What Horizon Does It Suit?
This type is commonly used for one- to three-year goals, by investors willing to accept more fluctuation than a money market fund.
Placing money needed within months here carries an added risk: if redeemed while bond prices are down, the value can be below the initial subscription value.
How Does It Differ from Buying Bonds Directly?
Aspect | Buying bonds directly | Fixed income fund |
|---|---|---|
| Choosing the series | Decided by the buyer | Decided by the investment manager |
| Diversification | Limited to the series bought | Spread across many series |
| Maturity | Yes, principal returns on a set date | The fund itself has no maturity date |
| Costs | Transaction costs | Management and custodian fees |
The maturity row is the one most often missed. A single bond returns principal on a set date; a fixed income fund has no such date because its portfolio is continually renewed.
What Are the Risks?
Interest rate risk — the value falls when market rates rise.
Default risk on the issuers of bonds held in the portfolio.
Liquidity risk if portfolio bonds are hard to sell at a fair price.
Fixed income funds are not covered by deposit insurance. Past performance does not guarantee future performance.
About the Manager
PT Korea Investment Management Indonesia is an investment manager registered with and supervised by the Financial Services Authority under licence number KEP-50/D.04/2019, operating in Indonesia since 2019.
Frequently Asked Questions
Does "fixed income" mean the return is certain?
No. What is fixed is the coupon on the bonds held, not the investor's value. That value moves with the prices of bonds in the portfolio.
Why can a fixed income fund fall in value?
Because bond prices move inversely to market interest rates. When rates rise, the prices of older bonds fall.
What horizon does it suit?
It is commonly used for one- to three-year goals, by investors willing to accept more fluctuation than a money market fund.
How does it differ from buying bonds directly?
A single bond returns principal on a set maturity date. A fixed income fund has no maturity date because its portfolio is continually renewed.
Is it covered by deposit insurance?
No. A fixed income fund is an investment product and is not covered by deposit insurance.
What is the biggest risk?
Interest rate risk. When market rates rise, the prices of bonds in the portfolio fall and the value of the investment falls with them.
Next Steps
Understand the underlying debt securities in our article on bonds.
See the range of funds managed by PT Korea Investment Management Indonesia on the Products page.