Income fund

Key Takeaways

  1. An income fund may be a mutual fund or an exchange-traded fund, which aims at generating income for investors through investment in securities. 
  2. Income funds provide stability and diversified portfolios to the investors.
  3. Income funds have a low expense ratio, which reduces management costs.

An investment fund which focuses on generating income as the primary goal, through means such as interest and dividends

The share prices of income funds are not constant; they often decrease during periods of rising interest rates and rise during periods of dropping interest rates. The bonds that make up these funds’ portfolios are typically investment-grade. The other securities have a high enough credit rating to guarantee capital preservation.

An income fund may be an ETF or an MF.

Income fund meaning

The investor who is willing to invest in funds but wants a steady income flow and low risk opts for income funds. Dividend-paying stocks and interest rates, these are the two ways through which an investor can get moderate returns. In India, investors prefer debt funds that invest in either government bonds or high rated government papers. Here, the main aim of investors is to protect the asset rather than to earn more profits. 

An investor can prefer debt funds or balanced funds to avoid risky market fluctuations. Balanced funds are a combination of equity and debt funds. In this fund, the equity part ensures a higher return, and the debt part focuses on a lower and steady income. Income funds include corporate bonds, government bonds, debentures, treasury bills, certificates of deposit, commercial papers, etc.

Income Funds Features

  1. Income funds provide a diversified portfolio by investing in a variety of securities.
  2. Income funds generally focus on steady income flow rather than higher returns. Therefore investors who are looking for income stability and secured investment opts for income funds.
  3. Income funds aren’t less risky. If an investor is investing in an equity income fund, then that investor is prone to a higher rate of risk than other funds. In case of the payment failure risk or default risk, the fund will carry the loss, which reduces the NAV value of the securities. Another risk is falling interest rates. If the interest rates increases, it reduces the accrued return on the bond, and thus NAV value also reduces, and opposite to that, if interest rate decreases, it increases the yield on a bond, which in turn increases the NAV value of securities. Therefore, return in income funds depends on the interest rate.