Income Funds are a category of debt mutual funds or ETFs that allows an investor to invest in debt instruments like debentures, corporate bonds, government securities, etc. for a long period of time. Income funds usually have returns that are better than those generated by fixed deposits. They serve as an excellent source of steady income.
Income funds are suitable for those investors who have an investment time horizon of at least four years and who can take a moderate amount of risk.
Types of Income Funds
The Macaulay duration of income funds as per SEBI is 4 years and above. Accordingly, there are two types of income funds :
- Medium to Long duration income funds, having Macaulay duration between four and seven years.
- Long Duration income funds, having Macaulay duration of above seven years.
Note: Macaulay duration is calculated as the weighted average of the time to receive the cash flows from a bond. In layman terms, it is the average time period an investor has to wait to get back all his invested money in the bond with periodic interest as well as principal repayments.
Features of Income Funds
The following are the main features of an income fund :
- Income funds invest in debt instruments with a higher-quality rating and lower interest rate risk.
- The upper limit of the expense ratio of income funds (as decided by SEBI) is 2.25%.
- Income funds have both credit risk and interest rate risk.
- The income funds take advantage of the volatility of the interest rates to meet its underlying objective. Under a falling interest rate regime, the returns offered by the income funds lie between 7-9%.
Benefits / Advantages
Investment in income funds provides the following benefits :
- The returns generated by the income funds are better when compared with those offered by fixed deposits. Income funds are an excellent source of steady income.
- Income funds have high liquidity. These funds have no lock-in period.
- Investment in income funds offers tax benefits to investors especially to those with an income tax bracket of 30%.
List of Top Performing Income Funds
Here are some of the income funds that have showcased better performance for the FY 2019-2020
- Franklin India Income Builder Fund
- Kotak Corporate Bond Fund
- SBI Regular Savings Fund
- Nippon India Income Fund
- Edelweiss Government Securities Fund
DISCLAIMER: The order of funds mentioned above doesn’t suggest any recommendations. Investors may choose the funds as per their goals and risk capacity. Returns are subject to market risks. Mutual funds are subject to market risks, please read the scheme documents carefully before investing.
