Income Funds

Abhinay Dhole
Abhinay Dhole
income funds

Investors strive to find the right opportunities to capitalize on profitable investments. While the market is filled with numerous avenues for potential candidates, investors need to be on their toes to identify the appropriate channels. If you are planning to make the most of your investments, ‘income funds’ can emerge as a viable option. Income funds refer to a type of ETF or mutual fund that emphasizes a person’s current income. Quite contrary to capital appreciation, income funds can be calculated and measured on a quarterly or monthly basis. Those dealing with this particular type of funds will come across a multitude of features such as preferred stocks, dividend-paying stocks, corporate debts, dividend-paying funds, and other market instruments.

How Income Funds Work?

Before making the final investment, it is imperative to identify the ways these funds work. These funds come with interesting highlights such as rising as well as declining ROIs. Active and efficient management of an investment portfolio is a crucial thing. ‘Net Assets Value’ or NAV of income funds are measured until four decimal points. The main idea or central strategies behind the operation of these funds are as follows:

• Instruments can be kept on hold till maturity to generate income

• In case the cost of instruments go up, investors can manage the gains by selling them off in the debt market.

Compared to traditional bank FDs, income funds can generate higher and better returns. The lock-in period in conventional bank deposits affects operational flexibility to a great extent. Income funds come with optimum flexibility and ease when it comes to withdrawing funds.

Identifying Proper Investors

If you plan to ensure a stable and fixed income for yourself, investing in ‘income funds’ will be the right decision. Since it’s accompanied by low-risk factors, most of the potential investors choose income funds over the other options like equity funds.

For instance, a person who has already taken retirement will opt for this particular investment option. They will surely wish for an income source that meets their regular expenditures and that’s where this fund works. Even conservative and old-school investors who wish to earn high returns should consider this investment.

Types of Income Funds

Income funds have diverse portfolios and can come in different varieties. Depending on their preferences and investment requirements, investors can identify the right type to put their money. It is highly imperative to choose the appropriate type that maximizes your profits. Here are some of the types available for potential investors:

1. Money Market funds

Although this type of investment yields low profits, money market funds are highly safe for new investors. Those operating with this type of funds can invest in treasury bills, commercial paper, and certificates-of-deposits. You might not get an FDIC insurance, but the safety and security they provide are quite high.

2. Income Funds in Equities

Investors can also invest in funds that pay dividends on a regular basis. These are equity income funds and have gained massive popularity among retiring investors. Dividends can offer a significant portion of a stock’s long-term return. Those on the verge of retiring can choose these type of funds as the opportunity to gain predictable income is quite high here.

3. Bond Funds

Investors can invest either in corporate or government bonds. While government bonds don’t carry critical risks, it happens to be a safe option for uncertain times. On the other end, corporate bonds carry additional risks which investors might not be prepared for. According to their features and highlights, these funds come in two different types:

• Investment-grade bond

Below-investment-grade bond

Junk bond funds

4. Other Income Options

Bonds focused on REITs, preferred stocks, and MLPs are some of the other income-producing investment options. These avenues can generate huge profits for investors who wish to make the most of their money. If you want to identify the most appropriate channel, it would be crucial to browse through the available options and put your trading skills to test. Some of the useful guides and ideal platforms will help you nail down the decision.

Things to Consider While Investing in Income Funds

You might be planning to leverage income funds and tap into the right resources for profitable investments. It’s here that the identification of factors become crucial. The key aspects should be considered and factors that make a difference should be analyzed. Here are a few pointers to keep in mind:

i. Returns

The presence of ROI volatility is an important factor in income funds. The fund can turn out to be the perfect channel for high returns. Even if your funds are performing under falling interest-rate scenarios, income funds can come up with rates as high as 7% to 9%. To put it simply, this fund option is the most effective alternative to traditional FDs.

ii. Costs

When you invest in income funds, it becomes crucial to know about the ‘expense ratio.’ It’s a fee that’s charged for perfect money management. The upper limit for this investment management cost as of now is at 2.25%. It is evident that a long-term holding period will just be the key factor in generating high profits.

iii. Associated risks

Credit and interest rate risks are the two critical situations associated with income funds. When the interest rates rise, investors experience a massive fall in the underlying bond value, which in turn affects the fund value negatively. Fund managers can invest in low-credit securities, which would give them the right opportunity to maximize overall risks, associated with the investment portfolio.

These factors play a pivotal role when it comes to investing in ‘income funds’. Effective and judicious consideration of these aspects will lead to a successful investment decision.

Options of Income Funds in India

While taking an investment decision, considering the diverse dimensions and angles of a particular fund type turns out to be crucial. The diverse qualitative, as well as quantitative parameters, will give you an idea of how these funds operate and can be dealt with. Apart from the general ideas and key factors, you will have to consider certain points such as investment horizon, risk appetite, and financial goals. Check out the table below that reflects the best income fund options for potential investors in the country:

Fund Name                Returns (%) 1 yearReturns (%) 3 yearsReturns (%) 5 years
Aditya Birla Sun Life Treasury Optimizer Fund6.988.439.54
SBI Regular Savings Fund7.248.559.98
Franklin India Income Builder Fund8.068.259.09
Axis Regular Savings Fund7.988.58.87
ICICI Prudential Banking & PSU Debt Fund7.078.738.99

The table represents the most popular and well-known income fund options in India. You can have an idea of the returns based on holding periods of 1, 3, and 5 years. It is imperative to consider the risks associated with such investments and then finalize the decision.

Taxation on Income Funds

When you invest in income funds, you receive capital gains, which are taxable. Currently, the taxation of income funds depends on the time for which the investment is held.

1 – Income funds held for less than 3 years

The investor will be levied tax on short-term capital gains. This will be added to taxable income and taxed as per applicable income tax slab

2 – Income funds held for 3 years or more

The investor will be levied tax on long-term capital gains. This will be taxed @ 20% after indexation and 10% without indexation. Indexation allows inflating the purchase price of debt funds so as to bring down the capital gains in line with inflation rates.

Tips to Make Profitable Investments

Making a precise, accurate, and hassle-free investment isn’t tough. You can nail down the best investment plan and execute the entire process successfully. Check out the following tips for the best guide:

a. Sign in at the leading online portals that offer investment opportunities.

b. Feed in personal details. You have to include the period and amount taken for investment.

c. Get the KYC formalities done. You can also do it online within a few minutes.

d. Breeze through the mutual fund options and then opt for the right debt fund. You are ready for investment.


Investing in income funds can be a great way to maximize returns. In spite of having its share of profits, losses, and risks, these funds have the potential to yield huge returns when invested wisely. With a crystal clear idea of the important factors associated with this fund type and a comprehensive guideline on the fund options available in India, you can make the most of your hard-earned money.

Abhinay Dhole
Abhinay Dhole

Abhinay is an IT Engineer turned content writer. He has a keen interest in the mutual funds industry and closely follows the market movements. He has been working in the personal finance domain for over 2 years.

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