The aim is to generate returns by investing in bonds and other fixed-income securities which means that these funds buy the bonds and earn interest income on the investments. The investment yield received by the investor is based on this. This is very similar to how a Fixed Deposit works. When you deposit money in a bank, you technically lend the money to the bank in return of which the bank offers you interest. However, there are various nuances to fixed income funds. For example, a liquid fund can buy securities of maturity upto 91 days and a Gilt fund can invest only in government bonds. Also, fixed income MFs do not offer assured returns as the returns are market linked and can fluctuate.

Fixed income mutual fund schemes which invest in debt and money market instruments like Commercial papers, debentures, T-Bills and government securities etc. These instruments pay interest during the investment tenure and pay the principal amount upon maturity. The yields of many of these instruments may be higher than bank FD interest rates with similar maturities. That is why the trailing returns of different debt fund categories are higher than that of bank interest / fixed deposits over different time horizons.