With so many mutual fund schemes on offer in India, you might have experienced confusion in finding the right fund. Who can deny the importance of a research-based approach to avoiding potential wealth creation pitfalls? Do you know what is income fund? This article will explore income funds offered in India, their important features, and their benefits. Without waiting any further, let’s get started.
What is Income Fund?
Interestingly, people typically associate fixed-income financial instruments only with fixed deposits (FDs). To ensure that you do not do so, we’ve quickly demystified income funds for you in detail.
Income funds predominantly invest their fund corpus in debt-based instruments such as corporate bonds, government securities, and other money market instruments of varying maturities. Popular fixed interest rate mutual funds available in India for investors include gilt funds, credit risk funds, dynamic bond funds, and corporate bond funds.
WHY SMC
- 20 Lac+ unique clients
- 33+ Years of Serving
- Advance Technical Analysis
- Free Demat Account
With rich features such as regular interest payouts and medium—to long-term capital preservation on offer, the adoption of income mutual funds has significantly increased in recent years. Income funds are managed by mutual fund houses, which manage their funds dynamically to optimize investor returns over the long term.
These funds are ideal for generating regular cash income. Given the sustained high interest rate regime that we are currently witnessing in India, you can easily dream of earning sizable returns on these funds. Notably, these funds offer better post-tax returns than their traditional counterparts (conventional fixed income options such as FDs).
Investors usually prefer income fund schemes to stabilize their portfolios and easily attain their long-term financial goals.
Plenty of fund houses offer income mutual funds for all categories of investors in India. So, whether your risk appetite is low, medium, or high, you can easily find an income fund based on your profile. In a true sense, now is the time to take benefit of exciting fixed income mutual fund returns.
Features of Income Funds
WHY SMC
- 20 Lac+ unique clients
- 33+ Years of Serving
- Advance Technical Analysis
- Free Demat Account
Let us look at the features of income funds offered in India.
Risk – Return Balance
Income funds are debt funds. That is, they carry both credit risk and interest rate risk. It is difficult to rule out the risk of the issuer being unable to repay the initial principal. Plus, there is always a risk of a low interest rate environment ruining your interest earnings.
In addition, the fund manager might invest in securities with low credit ratings to generate better returns. Amid all these risks, income funds usually give returns that exceed those on traditional fixed income instruments. Fund managers take advantage of the market’s volatility to maximise overall returns and meet investment objectives.
Tapping Interest Rate Scenario
By investing in promising debt securities, income funds ensure that the investors can get high returns over the medium to long term. You should consider purchasing these funds during low interest rate periods and exit when the interest rates tread the high trends.
Based on the amount you invest, this interest rate differential could help you significantly meet your financial objectives. In all, income funds offer a great option for investors looking to park their investments in long term fixed income securities. They are carefully structured to improve existing earnings.
Taxation
Regarding taxation rules in India, you must pay capital gains tax on the mutual funds profit. A capital gains tax is levied on the monetary gains you make for holding your investment between the purchase and redemption of your income fund units.
As per the existing rules in India, investors are required to pay capital gains tax. Notably, the capital gains that you make are added to your taxable income, and taxes are then charged as per the existing limits of your income tax slab.
By selecting the right fixed-income fund, you can balance the risk associated with these schemes with fixed returns earned over a sustained period.
Benefits of Income Funds
WHY SMC
- 20 Lac+ unique clients
- 33+ Years of Serving
- Advance Technical Analysis
- Free Demat Account
Let us look at the benefits of income funds. Notable benefits of income funds in India include the following.
Better Returns Than Fixed Deposits
Income funds usually generate returns that outperform the returns on traditional fixed-income instruments such as fixed deposits. While not as risk-free as FDs, there are ways to minimise the risks associated with these funds. For example, considering a reputable fixed-income fund house can help minimise credit and interest rate risk.
Managing Liquidity
Income funds offer a high degree of liquidity. Notably, most income funds have no provision for a lock-in period. Please note that some fund houses impose levies for early withdrawal. It is better to check all the applicable conditions before investing.
In summary, selecting mutual funds for income investments has several benefits. With the right balance of risk and returns, you could earn significantly higher interest income than traditional fixed-income investment instruments such as FDs.
Conclusion
Who would deny the charm of regular interest income? There is a possibility of generating better fixed-interest income with a financial instrument other than traditional FDs. Fixed income mutual fund is that instrument. Although fixed-income funds are riskier than FDs, the right balance of risk and returns could help you earn interest income that exceeds the returns on FDs.
FAQs
WHY SMC
- 20 Lac+ unique clients
- 33+ Years of Serving
- Advance Technical Analysis
- Free Demat Account
What are Fixed Income Mutual Funds?
Fixed-income mutual funds invest their corpus in debt securities such as government bonds, corporate bonds, and certificates of deposit. They offer stability in returns with limited risks of capital loss.
How do Fixed Income Mutual Funds Work?
Fixed-income funds pool in money from multiple investors to form a diversified portfolio consisting mostly of debt securities. The portfolio normally includes bonds with different maturity dates, credit ratings, and interest rates.
What are the Different Types of Fixed Income Mutual Funds?
Fixed-income mutual funds are commonly grouped into government bond funds, corporate bond funds, money market funds, and credit risk funds.
How Do I Choose the Right Fixed Income Mutual Fund?
You can select the right fixed-income mutual fund based on an analysis of factors such as the fund manager’s reputation, the fund’s objectives, your existing risk tolerance, expense ratio, and past performance of such funds.
References:
https://www.hdfclife.com/insurance-knowledge-centre/about-life-insurance/what-is-income-fund#:~:text=An%20income%20fund%20is%20mutual,fixed%20deposits%20and%20the%20like.
https://www.bajajfinserv.in/investments/what-is-income-fund
https://groww.in/p/income-funds
https://www.investopedia.com/terms/i/incomefund.asp
