What are income funds?
Income funds are open-ended medium-term debt mutual funds, ETFs or any other type of funds that aim at generating an income stream for investors who seek dividends and interest payments.
The fund intends to generate returns by investing in long-dated debt instruments like government securities, debentures, certificate of deposits, corporate bonds etc. The fund holds bonds, real estate investment trusts (REITs), preferred stock and common stock with an objective to earn a steady stream of income in the medium to long-term time horizon.
Depending on the holdings, the returns on these schemes can vary from being conservative to risky. Now if you seek to invest in income funds the biggest advantage it offers is instant diversification because of both its stock and bond selection. Some market experts believe that both stocks and bond prices have a correlation -- when the stock prices go up, the bond prices go down and vice versa. Since income funds invest in both and they offer an added hedge against market risks.
Income funds invest in a diversified set of fixed income securities and money market instruments in order to generate steady returns with low risk. The fund manager here aims to achieve an optimal risk-return balance to generate steady returns.
Income fund has a lot of advantages. To begin with, they are highly liquid where you can liquidate your investments anytime unlike a fixed deposit which comes with a lock-in period. Another comparison would be the interest rates, as income fund returns are generated from varying interest rate cycles which helps it gain superiority over returns from a fixed deposit. Another benefit of an income fund is if you hold it for more than a year you’d be taxed at 10 percent without indexation and 20 percent with indexation. Income funds offer high flexibility where you can systematically withdraw and invest money to generate regular cash flow.So if you are an investor looking for a regular income over a medium to long-term time horizon, with a moderate risk appetite, income funds could be your answer. When you are building a portfolio it is important you build your portfolio with a combination of equity funds.