Income Funds

Income funds are a specific type of mutual funds, investing primarily in corporate bonds, debentures, government securities, etc. These funds aim to generate a regular income and have a longer investment horizon. 


Best suited for conservative investors, income mutual funds ensure the safety of the invested capital and strive to grow your capital over a specific duration. If you are planning for your retirement, looking to fund your child’s education or want to meet any other similar long-term goals, opting for income funds is an ideal solution.


Read on to understand the benefits and features of these funds that can help you make informed decisions.

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Features of Income Funds

These funds are a class of debt funds, wherein fund managers invest your corpus in fixed income bonds and securities. Using income funds, investors stand to earn fixed returns on their invested income. 


However, remember that income funds also carry minimal risk parameters if they are managed properly by fund managers. You can use these funds to diversify your financial portfolio and mitigate certain risk factors which are common to other types of mutual funds.


Fixed income funds have a duration exceeding four years and can extend up to a period of 7 years or more. Your fund manager ensures to generate fixed returns irrespective of the fluctuating interest rates in the market. 


Simply put, regardless of whether the interest rates decrease or increase, fixed income mutual funds strive to generate returns on your invested income. This happens because of the apt management of the investment portfolio. 


Most fund managers handling income funds apply two crucial strategies to earn fixed returns. The first step is to generate sufficient interest income, while the second method is to earn returns on the invested funds.

The former is achieved when a particular income fund holds the debt instrument until maturity. However, to deploy the second strategy, the fund manager sells these debt instruments in the stock market when there is an increase in their price.


Income funds usually opt for debt instruments providing higher security and a lower interest rate risk. Now that you have a fair idea of what are income funds, here are a few additional features of these funds you need to be aware of:


  • Income funds have an expense ratio of 2.25%, as fixed by SEBI

  • As these funds come with interest rate risks and credit risks, fund managers may invest your corpus in securities with a low credit quality rating

  • Such funds take advantage of market volatility to meet specific investment goals

  • Ideal to invest in income funds when interest rates decrease and exit the fund when rates increase

  • Capital gains tax levied on income mutual funds depending on the holding period

  • STCG or Short-term capital gains are applicable as per your income tax slab if you hold units for a period of up to 3 years

  • LTCG or Long-term capital gains are earned if you hold the units for a duration exceeding 3 years and taxed at 20% along with indexation benefits

Benefits of Income Funds

Here are a few benefits you stand to earn when you invest in income funds.


  • Access to Higher Liquidity


As these funds do not have a mandatory lock-in period, you can redeem your investments at your convenience. However, note that these funds come with an exit-load fee depending on the scheme you choose. 


This way, you are free to withdraw money on any business day, with the redemption amount being credited to your account within T+3 working days.


  • Enjoy Better Returns


Investing in these funds offers higher returns when compared to fixed deposit investments. As these funds make the most of interest rate volatility, they are able to generate stable returns over a specific timeline.


However, remember that mutual fund returns are always subject to market risks, so their performance entirely depends on prevailing market conditions. Investing in income mutual funds can help diversify your portfolio and mitigate the overall risk factor.


  • Gain Tax Benefits


As mentioned, you can earn tax benefits when you invest in these funds. However, to enjoy them, you need to fall within the highest income tax bracket of 30%. The LTCG is taxed at 20%, coupled with indexation benefits in comparison to a fixed deposit interest income, which is taxed based on your individual tax slab.


  • Meet Your Financial Goals


Whether you are a salaried individual or a self-employed professional, investing in these funds can help you generate an added income stream. As these funds primarily invest in securities generating higher income, you can earn sustained returns during a specific timeline.


This helps you meet your planned goals and also provides an alternate income option post retirement. You may even invest in these funds to meet short-term goals like funding your children’s education, etc.

Key Parameters to Consider When Investing in Income Funds

While you are familiar with features and benefits, here are some critical points to consider before investing in income mutual funds.


  • Evaluate the Risks


This risk aspect depends on the type of holding you invest in. If you hold a higher equity component, you may experience a higher risk. As these funds carry both credit and interest risks, you need to analyse the risk component when investing in mutual funds.


  • Analyse the Tax Efficiency of These Funds


You need to understand the tax slab category you fall into before investing in these funds. This helps you enjoy tax benefits. However, note that you need to fall within the tax bracket of 20-30% and hold your units for a period exceeding 3 years if you want to get tax benefits.


  • Gauge the Costs Associated with Income Funds


While these funds do not necessarily include a mandatory lock-in duration, you may have to pay an exit load when you redeem the units before the duration of 3 years. So, you need to check with your fund manager as the exit load varies from one scheme to another. 


Apart from this, you need to assess the expense ratio of your fund. A higher ratio translates to lesser returns, which can affect your returns considerably. Furthermore, you all need to check the returns delivered by the fund over a specific timeline.


Keeping a tab on these factors helps you choose the right income mutual fund that allows you to earn fixed returns. Armed with the details mentioned above, you can invest in the right income fund that can help you align with your financial goals. 

To begin your trading journey, you can check out various mutual funds online and invest on Bajaj Markets.

FAQs on Income Funds

Who is eligible for investing in income funds?

These funds are ideal for investors with a moderate risk appetite who plan to generate regular returns from their invested corpus.

What are the various risks associated with income mutual funds?

When is the ideal time to invest in fixed income mutual funds?

What are the various securities income funds to invest in?


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