March 15, 2023
Table of Content
1. What is an Income Fund?
2. How Does an Income Fund Work?
3. Who Is It Suitable For?
Income funds also known as debt funds or bond funds are ideal for conservative investors. Such investors are averse to taking on risk that is associated with equities.
An income fund is mutual fund or a ULIP (unit-linked investment plan) or any other type of investment that aims at generating an income stream for investors by investing in fixed income securities like government securities or gsecs/gilts, bonds, debentures, fixed deposits and the like.
They aim for safety of capital combined with reasonable growth in capital over a period of time and hence prefer income-generating investments like -
- bonds
- fixed deposits
- government securities
Income funds are also offered by ULIPs. They are managed with well-defined controls and guidelines on where the fund manager can and cannot invest, although this varies across insurers and mutual funds.
How Does an Income Fund Work?
Typically, the fund manager invests in fixed income securities with higher credit ratings and established financial track records. Such companies have lower default risk in repayment of capital and interest.
The objective of the income fund is to maximize income. This reflects in two ways:
- Capital appreciation which is when the NAV or net asset value rises over a period of time
Dividend payout at periodic intervals depending on surplus funds
For an investor, income funds are ideal for planning forchild's education, setting aside money towards down payment on a house, retirement planning, among other long-term goals.
Even investors with higher risk appetites who prefer to invest through equity funds / equities, can consider investing a portion of money in income funds for diversification.
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