What Is an Income Fund?
An income fund is a type of mutual fund or exchange-traded fund (ETF) that emphasizes current income, either on a monthly or quarterly basis, as opposed to capital gains or appreciation. Such funds usually hold a variety of government, municipal, and corporate debt obligations, preferred stock, money market instruments, and dividend-paying stocks.
Key Takeaways
- Income funds are mutual funds or ETFs that prioritize current income, often in the form of interest or dividend-paying investments.
- Income funds may invest in bonds or other fixed-income securities as well as preferred shares and dividend stocks.
- Income funds are often considered lower risk than funds that prioritize capital gains.
The Basics of Income Funds
Share prices of income funds are not fixed; they tend to fall when interest rates are rising and to increase when interest rates are falling. Generally, the bonds included in the portfolios of these funds are investment-grade. The other securities are of sufficient credit quality to assure the preservation of capital.
There are two popular types of high-risk funds that also focus mainly on income: high-yield bond funds that invest primarily in corporate junk bonds and bank loan funds that invest in floating-rate loans issued by banks or other financial institutions.
Income funds come in several varieties. The primary differentiation involves the types of securities they invest in to generate income.
Money Market Funds
Money market funds generally invest in certificates of deposit (CDs), commercial paper, and short-term Treasury bills. These funds are designed to be very safe investments aiming to maintain a low share price at all times, but they also tend to offer relatively low yields. While these funds don't carry the Federal Deposit Insurance Corporation (FDIC) insurance that bank products do, money market funds have traditionally provided a high degree of safety.
Bond Funds
Bond funds typically invest in corporate and government bonds. Government bond funds carry virtually no default risk and, therefore, can act as a safe haven for investors in times of uncertainty, but normally offer lower yields than comparable corporate bond funds. Corporate bonds carry the additional risk that the issuer may not be able to make principal or interest payments. As a result, they tend to pay higher interest rates to account for the additional risk. Corporate bond funds can be split into investment-grade bond funds and below-investment-grade, or junk, bond funds.
Equity Income Funds
Many companies pay dividends on their stocks. Funds invested primarily in stocks that pay regular dividends are known as equity income funds. These types of funds are especially popular among retirement-age investors that look to live off of the predictable monthly income generated from their portfolios. Historically, dividends have provided a significant percentage of a stock's total long-term return.
Other Income Funds
Other income-producing funds include those focused on real estate investment trusts (REITs), master limited partnerships (MLPs), and preferred stocks.
Example of an Income Fund
The T. Rowe Price Equity Income Fund has $17.51 billion in net assets as of Q1 2021 and seeks a high rate of growth through high dividend-paying stocks in combination with capital appreciation. The fund, which distributes payouts quarterly,paid a dividend of $0.18 per share on Dec. 14, 2020. The fund has performed relatively in line with its benchmark. An investment of $10,000 in the T. Rowe Price Equity Income Fund at inception in 1985 would be worth around $24,5100 as of Feb. 28, 2021. The LipperEquity Income Funds Average result for the same amount over the same period would be about $25,150.
FAQs
Usually organized through financial institutions, income funds consist of preferred stock, dividend-paying stocks, bonds, and government/corporate debt obligations. Such funds are considered a low-risk option for investors because they typically hold stocks with a fair history of paying dividends.
What type of fund is an income fund? ›
What Is an Income Fund? An income fund is a mutual fund or exchange-traded fund (ETF) that seeks to generate current income through dividends or interest payments. Some also provide an opportunity for capital appreciation.
What are the characteristics of income funds? ›
Income funds are mutual funds or ETFs that prioritize current income, often in the form of interest or dividend-paying investments. Income funds may invest in bonds or other fixed-income securities as well as preferred shares and dividend stocks.
What are the benefits of income funds? ›
Income Funds typically offer higher returns than fixed deposits. If not adequately managed, interest rate risk and credit risk can follow Income Funds. Income Funds help you diversify your portfolio and mitigate the inherent investment risks.
Is an income fund risky? ›
Income funds generally have less risk than equity funds since they primarily hold fixed-income securities. However, they also offer lower potential returns. An income fund's risk and return mix depends on the underlying securities' credit quality, interest rate changes, and the fund's management.
How does the income fund work? ›
An income fund pays out any interest and dividend income as cash into your account, usually on a regular basis. You can identify this type of fund with 'Inc' in its name. Income funds usually invest in shares in relatively stable companies that pay out regular dividends.
What are the three fund categories? ›
The Generally Accepted Accounting Principles (GAAP) basis classification divides funds into three fund categories: governmental, proprietary, and fiduciary.
How do income funds pay out? ›
Income funds pay any profits directly to the investor as cash. These funds will use the initials 'Inc' for income or 'Div' for dividend in the fund name.
Who should invest in income funds? ›
Such funds are considered a low-risk option for investors because they typically hold stocks with a fair history of paying dividends. Due to the low-risk and fixed nature of income funds, they are popular among individuals who would like to create an additional income stream for when they retire.
What is the difference between income fund and growth fund? ›
Here's the quick and dirty defining difference: an Income Investment is one which pays out dividends to the investor. A Growth investment, on the other hand, is based on compound interest and is dedicated to growing the original sum as much as possible.
Being a type of debt fund, an income fund carries both credit risk and interest rate risk. Credit Risk – this is the default risk of the issuer not repaying the principal and interest. Interest Rate Risk – this is the risk due to the impact of the change in interest rates on the value of the fund's securities.
Who has the best income fund? ›
The Best Retirement Income Funds of May 2024
| Fund | Expense Ratio |
|---|
| Dodge and Cox Income Fund (DODIX) | 0.41% |
| PGIM High Yield Fund (PHYZX) | 0.51% |
| T. Rowe Price Dividend Growth Fund (PRDGX) | 0.64% |
| Schwab International Index Fund (SWISX) | 0.06% |
5 more rowsMay 1, 2024
Private income funds create income by investing in assets such as bonds, real estate, and dividend-paying equities.
What is the interest rate of income fund? ›
1. Current NAV: The Current Net Asset Value of the Nippon India Income Fund as of May 14, 2024 is Rs 10.81 for IDCW Monthly option of its Regular plan. 2. Returns: Its trailing returns over different time periods are: 5.99% (1yr), 4.79% (3yr), 6.66% (5yr) and 8.3% (since launch).
What is a monthly income fund? ›
A monthly income plan is a type of mutual fund. The objective is to preserve capital and generate cash flow by investing in a mix of debt and equity securities. As such, they provide an alternative, steady income stream to investors who need it, including retirees. This comes in dividends or interest payments.
What is the difference between debt fund and income fund? ›
A debt fund is a mutual fund scheme that invests in fixed income instruments, such as Corporate and Government Bonds, corporate debt securities, and money market instruments etc. that offer capital appreciation. Debt funds are also referred to as Income Funds or Bond Funds.
Are income funds bond funds? ›
What is a bond fund? "Bond funds" and "income funds" are terms used to describe a type of investment company (mutual fund, ETF, closed-end fund or unit investment trust (UIT)) that invests primarily in bonds or other types of debt securities.
What kind of fund is growth and income? ›
A growth and income fund may invest only in equities or in a combination of stocks, bonds, real estate investment trusts (REIT) and other securities. A growth and income fund is a type of blend fund, which invests in both growth and value stocks.
What is an income market fund? ›
Income Fund
These funds generally invest in money market securities, term finance certificates/sukuks, commercial paper, and spread transactions. The aim of an income fund is to generate regular stream of income.
