Comparte Capital Investment

What are income mutual funds or income schemes in mutual find?

Income funds are debt mutual funds that invest in fixed income securities

Income funds are ideal for investors who are looking to earn a regular and reliable income.

Income mutual funds or income schemes are a smart investment instrument for investors of different age groups. It can be an alternative source of income for earning individuals, or financial support during unforeseen emergencies, or an effective retirement plan. If your investment goal is to earn a steady income, the income schemes in mutual fund is an excellent option. Income mutual funds belong to the category of debt funds and they predominantly invest in government and corporate bonds and securities and money market instruments.

What are income mutual funds or income schemes in mutual find?

Income funds are debt mutual funds that invest in fixed income securities such as corporate bonds, government bonds, corporate debentures, Government securities, Certificates of Deposits (CD) and money market instruments. These funds provide a regular and steady income to investors. The diversification of funds also enables the investors to invest in equities as well as bonds.

As income funds do not get affected by fluctuations in equity markets, investment here is less risky compared to equity schemes. At the same time, opportunities for capital appreciation are also limited. The change in the country’s interest rates affects Net Asset Value or NAVs of such funds. If the interest rates fall, NAVs of income funds are likely to increase in the short run and vice versa. However, long term investors hardly bother about these fluctuations.

Who Should Invest in Income Funds?

Income funds are ideal for investors who are looking to earn a regular and reliable income. The primary focus of these funds is on generating income for the investors rather than wealth creation. The interest income usually generated by holding the investment until maturity or these can be sold in the debt market to make gains if the returns on the investment are comparatively better. As changes in the interest rates impact the fund considerably, it is most suited for investors with a long-term horizon and willing to take risk aggressively.

Factors for Consideration before Investing in Income Funds

Risk factors

If the investment in the equity component is more, the risk will also be more. Income funds invest in both stock and bond markets and allow a hedge against market risks. Income funds are exposed to both interest rate risk and credit risk. Lower the interest rates, the lesser will be the risks involved.


According to the trend analysis of last 10 years, income funds found to provide the benefits of compounded interest. They also generate higher returns when remain invested for 3 years or more.

 Investment Horizon

Investors who want a safe place to park their money for a short period, there are some short-term income funds with an investment horizon of just a few days. On the other hand, medium to long-term debt funds have a longer investment horizon.

 Cost of the Fund

The best time to invest in income funds is when there will be a fall in interest rates because they make money by either holding the instruments until maturity or by selling them in the debt market at the right time when the returns are positive.

Expense Ratio

As per SEBI regulations, the expense ratio is limited to a maximum rate of 2.5% of the NAV. The investors need to consider these charges levied on the returns earned by them by fund houses while estimating returns.

How do Income Funds work?

Income funds portfolio involves two different strategies:

  1. Generating income in the form of interest on holding the fund till the end of the maturity.
  2. Selling them when their market prices rise.

Fund managers aiming at high returns allocate the assets in the portfolio towards debt and money market instruments. Based on the holdings, income funds can be regarded as conservative or risky investments. There are income funds that invest only in securities of reputed companies for consistent dividend earnings. On the other hand, others generate income through payment of interests only. However, there are some specific income funds that appeal to investors with a high-risk appetite by investing in instruments like bonds and REIT offering higher returns than the conservative funds.

Income funds offer instant diversification by investing in a combination of stocks and bonds. The prices of stocks and bonds are negatively correlated, which means when the prices of bonds go up, the prices of stocks fall and vice versa. It is highly recommended that investors invest in both to maintain a healthy balance during unstable conditions of the capital market that act as a hedge against market risks. However, the concept of negative correlation is contradictory.

Advantages of Income Funds

Higher returns compared to traditional FDs

In the last decade, Income funds have generated higher returns compared to 3-year Fixed Deposits. You can make the most of the benefits by investing in a combination of both Income Funds and FDs.

 Low Re-investment Risks

In contrast to fixed deposits that attract lower rates of interest when re-invested after maturity, re-investing income funds in multiple interest rate cycles guarantees higher returns.

 Ensure Liquidity

In the case of Income funds, investors are able to withdraw money as per their convenience, which is not possible with traditional fixed deposits that have a fixed lock-in period.

 Ensure Flexibility

Income funds also offer a systematic withdrawal feature to withdraw cash at systematic intervals, acting as a regular and steady source of income.

 Tax Benefits

After being held for a year, Income funds are subject to long-term capital gains and are taxed at the rate of 10% without indexation or 20% with indexation. The higher the tax slab, it generates the maximum returns. Therefore, a 30% tax makes the best returns than the 20% and 10% tax slabs. On the other hand, interest on fixed deposits is taxed as per your income slab.

As an investor, to evaluate Income funds, the reputation of fund house, creditworthiness of the Asset Management Company (AMC), fund performance across market cycles and expertise of the fund manager to cope with market volatility need to be considered. Income funds generate higher returns for a longer-term; therefore, it is best to sell them after maturity, and purchasing of income funds is ideal when the interest rates are low. There are fund distributors or agents or relationship managers to help you out with all these timely decisions regarding investments to fulfill your financial goal.

That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.

With this one can say “Mutual Fund Sahi hai”,  so let me do Nivesh