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.
EXPLORE FUNDS
Income Funds
EXPLORE FUNDS
3 min
05-June-2024

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.

Conclusion

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.

Calculate your expected investment returns with the help of our investment calculators

Investment Calculator

SIP Calculator

Lumpsum Calculator

Step Up SIP Calculator

Mutual Fund Calculator

Brokerage Calculator

FD calculator

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.
Show More Show Less

Related videos

Bajaj Finserv App for All Your Financial Needs and Goals

Trusted by 50 million+ customers in India, Bajaj Finserv App is a one-stop solution for all your financial needs and goals.

You can use the Bajaj Finserv App to:

  • Apply for loans online, such as Instant Personal Loan, Home Loan, Business Loan, Gold Loan, and more.
  • Explore and apply for co-branded credit cards online.
  • Invest in fixed deposits and mutual funds on the app.
  • Choose from multiple insurance for your health, motor and even pocket insurance, from various insurance providers.
  • Pay and manage your bills and recharges using the BBPS platform. Use Bajaj Pay and Bajaj Wallet for quick and simple money transfers and transactions.
  • Apply for Insta EMI Card and get a pre-approved limit on the app. Explore over 1 million products on the app that can be purchased from a partner store on No Cost EMIs.
  • Shop from over 100+ brand partners that offer a diverse range of products and services.
  • Use specialised tools like EMI calculators, SIP Calculators
  • Check your credit score, download loan statements and even get quick customer support—all on the app.

Download the Bajaj Finserv App today and experience the convenience of managing your finances on one app.

Do more with the Bajaj Finserv App!

UPI, Wallet, Loans, Investments, Cards, Shopping and more

GET THE APP

Disclaimer

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.

Disclaimer:

Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319

BFL does NOT:

(i) provide investment advisory services in any manner or form:

(ii) carry customized/personalized suitability assessment:

(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.

In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.

Disclaimer on Risk-O-Meter:

Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc, and shall also consult their Professional advisors, if they are unsure about the suitability of the scheme before investing.