Income Funds

  • Safe Investment Portfolios like Govt Bonds and Money Market

  • Fixed Income Irrespective of Market Fluctuation

  • Handpicked Fund Schemes from the top AMCs

  • Lumpsum and SIP Investment Options

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Top Income Fund Name 3-Year returns5-Year Returns
L&T Low Duration Fund8.28%8.74%
Aditya Birla Sun Life Savings Fund8.08%8.52%
UTI Treasury Advantage Fund7.76%8.26%
DSP Credit Risk Fund4.73%6.83%
Reliance Low Duration Fund7.59%8.01%/td>
Aditya Birla Sun Life Medium Term Plan7.42%8.67%

*ORDER does not indicate a ranking of the funds. 

What are Income Funds?

Income Funds are essentially a mutual fund scheme or Exchange Traded Fund Scheme or any other kind of fund which aims to create a stream of income for investors. The portfolio of these types of funds is essentially in securities that offer dividends or interest payments such as government bonds and money market instruments like a certificate of deposits. These funds serve as a great avenue for investors who are presently looking for a steady source of income.

Income funds are a type of debt fund which means the investment portfolio has a focus on debt instruments which assure steady returns with a relatively lower risk factor. In income funds, there is a provision of diversification of the portfolio via investment in equities and binds alike. Income funds come with an investment in various asset classes like government securities, certificates of deposits, and bonds. The priority is with investment in assets with high-interest rates. Doing this helps create higher dividends that are either further invested or distributed to the investors.

How do Income Funds work?

The NAV or Net Asset Value of Income Funds is calculated up to 4 decimal places. An active portfolio management style of the fund has been set up with the aim to deliver returns in either declining or and rising interest rates. In accordance with the same, there might two strategies deployed :

  • Interest Rate Income by holding instruments till the date of maturity
  • Gains management by sale in the debt market if the price of the instrument goes up.

The aim of the fund manager is always to deliver efficiently high returns with high stability. This is achieved by allocating the money towards investment-grade debt and money market instruments with low levels of interest rate risks.

With regards to the risk profile, income funds can be classified as conservative to moderate risk-based funds which depend upon the type of holding. The type of risk you will encounter depends totally upon the Asset Management Company (AMC) and the respective fund manager.

Some agencies will only choose from the most trustworthy, established, and credible companies that deliver consistent interest or dividend which will make them a more conservative investment avenue. Other Fund Management Companies will invest a little riskier avenues such as Real Estate Investment Trusts (REITs) and junk bonds in order to achieve higher returns in comparison to the more conservatively geared investment types.

One of the salient advantages of income funds is portfolio diversification, the inclusion of both stocks and bonds in the same fund takes the diversity to a greater level. It is important to take note of the fact that maximizing the income via the fund might not result in regular payments to the investors, the fund might decide to make special investments as and when they see fit. It is defined in the income funds’ prospectus that when they will make dividend payments to the investors.

Should I Invest in Income Funds?

As mentioned before, income funds invest in debt-related securities such as corporate bonds, government bonds, as well as, money market instruments. The change in interest rates in the market impact these funds heavily. This indicates that the income funds are mutual funds schemes that are geared towards investors who are aggressive risk-seekers, in addition to being invested for longer investment horizons. For these reasons, you need to be judicious in the choice of your entry and exit from these funds. The motive of the income funds as the name suggests is to generate income for the investors instead of wealth creation. Therefore, these funds are for those investors looking for a regular and reliable source of income.

Things to look out for while Investing

Before investing in income funds, there are a few factors that should influence your decision of whether or not these funds are suited to your profile or not. Below are some of the factors you should consider.


As mentioned before, the income funds are a mutual fund scheme that is highly susceptible to high credit risk and interest rate risks. Higher interest rates will lead to a depreciation of the bond value which in turn results in a fall in the fund value. The risk factors are also aggravated by factors such as default on payment and the fund managers’ risk-taking inclination. Thus, the overall portfolio risk should be assessed properly before the investment happens.


Income funds can act as a great source to muster up high returns in lieu of interest rate volatility. These returns can especially be highly beneficial in times of falling interest rates. Income funds can and have delivered high returns in the range of 7-9 %. Income funds can serve as a great alternative to a bank’s fixed deposits.


In order to efficiently manage your monetary resources, the fund charges you a nominal fee also known as the expense ratio. The Securities Exchange Board of India (SEBI) has mandated the upper limit of the expense ratio to be 2.25 %. Long term holding periods could help out in recovering the monetary resources gone out by the means of an expense ratio.

Investment Horizon

Investment horizons (the time period of investment) ranging up to 1-3 years could be a factor for investments of the short-term surplus funds into the income funds. The entry and exit from these kinds of funds should be timed appropriately in order to extract the most returns from these funds. The ideal time to enter the funds would be at low-interest rates and an exit should be made as soon as the rate of interest starts to rise. If there are some funds you have lying around instead of contributing them towards a Fixed Deposit (FD) you should consider investing in the income funds.

Financial Goals

The high-income securities which form the portfolio of the income funds have been touted to be ideal for supplementing the current income with a stable and frequent returns policy. Retired personnel might invest in this mutual fund scheme in order to generate some extra income from their pension. Short-term goals for higher education can be achieved by these funds as these funds are very flexible.

Fund Taxation

When you make an investment in income funds, the returns/gains are taxable. The rate of taxation depends upon the time you are invested in the schemes also known as the holding period. Capital Gain within a period of up to 3-years is termed as a Short Term Capital Gain (STCG) and are taxed under the regulations of the STCG tax. Capital Gains of more than 3 years are termed as Long Term Capital Gain (LTCG) and have a corresponding LTCG tax.

Evaluating an Income Fund

Fund House Reputation

When you go for an income fund, the reputation of the AMC or the Asset Management Company plays a big factor in your investment. A reputed mutual fund house is more likely to attract a first-time investor since many of them stumble upon mutual funds via a word of mouth.

Fund History

Generally, many investors tend to look at the past performance of the funds in order to decide their particular fund. Generally, an investor should look at the performance of the fund over the past 5 years or so in order to properly access the performance of the fund overbullish and rough market conditions/cycles and interest rate changes.

Past Returns

It could so happen that a fund that performed well in the last year could very well perform very well if the market conditions remain relatively similar. You can assess a particular fund’s fund manager’s ability to handle volatility based on the returns they have generated in the past.

Financial Ratios

The risk assessment of any mutual fund including the income mutual fund can be done via the many risk assessment tools and financial ratios available. This information related to the funds is easily available on the web via different financial banking websites.

Expense Ratio

Investors should invest in a scheme seeing the mutual fund’s scheme’s expense ratio which is essentially the charges the fund company will take for managing your assets. This expense ratio fee is deducted from your returns. SEBI has mandated an upper limit of 2.5% of the NAV as a tax on your returns.

Information Ratio

This basically acts as an indicator of the fund manager’s ability and skill level to handle and manage the delivery of higher risk-adjusted returns against the benchmarks. Information Ratio is essentially benchmark returns deducted from the overall portfolio

Sharpe Ratio

Higher Returns don’t necessarily translate to a better fund performance always. What does make an impact on the earnings is a risk-adjusted return These risk-adjusted returns are measured by a financial ratio known as Sharpe Ratio

Standard Deviation

Standard Deviation basically indicates the measure by which the fund’s deviated from the average returns. If the average returns are 7% and the fund delivers 9% returns there is a positive deviation.