Income Funds

Income funds generate income rather than capital growth. They achieve this by investing in dividend-paying stocks, bonds, and other securities that generate income.
Income Funds
3 min

Income funds are a type of mutual fund that aims to provide investors steady income stream, prioritizing regular payouts over capital growth. They invest in fixed income securities like bonds, government securities, and dividend-paying stocks, alongside other assets such as certificates of deposit and money market instruments. These funds provide stability and potential tax benefits but carry risks like interest rate fluctuations and credit risks.

What are Income Funds?

Income funds are a specialised category within the broader spectrum of debt funds, designed to cater to investors seeking steady income through investments in various debt instruments. These funds primarily focus on debentures, corporate bonds, government securities, and other fixed-income assets, maintaining investments over an extended period. According to the Securities and Exchange Board of India (SEBI), income funds are defined based on their Macaulay Duration, a critical measure indicating the sensitivity of the fund’s portfolio to changes in interest rates. This classification bifurcates income mutual funds into two distinct categories:

  • Medium to Long Duration Fund: Defined by a Macaulay Duration of four to seven years.
  • Long Duration Fund: Characterised by a Macaulay Duration exceeding seven years.

This distinction helps investors understand the fund's risk and return dynamics, particularly concerning interest rate fluctuations.

How do Income Mutual Funds work?

The core strategy of income mutual funds revolves around manoeuvring through the varying landscape of interest rates to secure stable returns as compared to equity mutual funds. This strategy encompasses two principal approaches:

  • Accruing interest income: Achieved by retaining debt instruments until their maturity.
  • Realising capital gains: Executed by selling debt instruments at a higher market price than their purchase price.

The selection of debt instruments is guided by a stringent criterion that balances high credit quality with low interest rate risk, which historically has allowed these funds to surpass traditional banking savings and fixed deposit returns. This approach provides investors with both higher flexibility and liquidity options.

Who should invest in an Income Mutual Fund?

Income mutual fund schemes are ideally suited for investors who have a moderate risk tolerance but are keen on generating regular income from their investments. They offer a sanctuary for conservative investors who wish to dip their toes into mutual funds without exposing themselves to high risk.

Features of an income fund

An in-depth look at income funds reveals several key features:

Understanding expense ratio

  • What it is: The expense ratio represents the fee charged by fund houses for managing your investment, calculated as a percentage of the fund's total assets.
  • Regulatory cap: The Securities and Exchange Board of India (SEBI) has set a maximum limit for expense ratios at 2.25% for income funds.
  • Impact on returns: Income Mutual Funds typically offer modest returns. Therefore, a higher expense ratio can significantly reduce your earnings.

Risks and returns of income funds

  • Credit risk: The danger that the issuer may default on paying back principal and interest.
  • Interest Rate Risk: The risk of changing interest rates affecting the fund's securities' value.
  • Seeking higher returns: Fund managers may invest in lower credit quality securities to achieve better returns, increasing portfolio risk.
  • Returns potential: In a falling interest rate environment, income funds' returns may range between 7-9%, leveraging interest rate volatility to meet investment goals.

Investment strategy for income funds

  • Ideal for long-term investment: Comparable to long-term fixed deposits, income funds aim to boost your current income through investment in debt securities.
  • Timing: Invest during falling interest rates and consider exiting as rates begin to rise, to optimise returns.

Tax implications for income mutual funds

  • Capital gains tax: Taxes on profits depend on the holding period.
  • Short-term capital gains (STCG): For holdings up to three years, gains are taxed as per your income tax slab.
  • Long-term capital gains (LTCG): For holdings over three years, gains are taxed at 20% with indexation benefits, offering some relief from inflation.

Benefits of diving into income mutual funds

The allure of income funds lies in their potential to deliver returns that can outpace those from fixed deposits, providing an attractive investment vehicle with manageable risks. Notably, they offer significant liquidity advantages over fixed deposits, with no penalties for early withdrawal, though it’s prudent to be aware of any applicable exit loads. Furthermore, for individuals in higher tax brackets, the tax efficiency of income funds on long-term capital gains presents a compelling benefit compared to the taxation on interest from fixed deposits.


You can compare the mutual fund options in India and choose a scheme that aligns with your risk tolerance levels as well as your financial goals. Make sure to place your investments with reputable Asset Management Companies (AMCs). Navigating income funds becomes considerably more straightforward with the Bajaj Finserv Mutual Fund Platform. Boasting an expansive listing of over 1000 mutual funds, the platform serves as an invaluable resource for investors. Whether you're strategising for income generation, capital preservation, or exploring the nuanced dynamics of fixed income durations and monthly income mutual funds, the Bajaj Finserv Platform offers a comprehensive suite of options tailored to meet diverse investment objectives and horizons.

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Frequently asked questions

Is it safe to invest in an income fund?
Investing in income funds can be a good strategy for certain investors, particularly those seeking regular income streams from their investments. Income funds primarily invest in bonds, dividend-paying stocks, and other income-generating assets, aiming to provide investors with consistent payouts. This can offer a more predictable source of income compared to more volatile investment options, which may appeal to risk-averse investors or those with specific income needs.
Advantages of income funds?
Income funds are used by investors for several reasons. Firstly, they provide a steady income, which is attractive for those who need regular cash flows, such as retirees. Secondly, they offer diversification, spreading investments across various assets to reduce risk. Lastly, income funds can be a more accessible way for individual investors to invest in a broad range of income-generating assets, which might be difficult to achieve on their own.
What is the difference between FD and income funds?
The difference between Fixed Deposits (FDs) and income funds lies in their nature and risk profile. FDs are bank products that offer a guaranteed return over a specified period, making them a safer, low-risk investment. On the other hand, income funds, while aiming for steady income, do not guarantee returns and their value can fluctuate based on market conditions. This makes income funds potentially more rewarding but also riskier compared to FDs.
What is returns from an income fund?
Income from an income fund comes from its investments in income-generating assets. This includes dividends from stocks, interest from bonds, or other forms of earnings from its holdings. The fund collects these income streams and, after deducting expenses, distributes them to investors typically on a monthly or quarterly basis. The amount of income can vary based on the performance of the underlying assets and market conditions & Interest rate, making it less predictable than the fixed interest from FDs.
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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.