What Is an Income Fund?
An income fund is a type of mutual fund or exchange-traded fund (ETF) that emphasizes current income, either on a monthly or quarterly basis, as opposed to capital gains or appreciation. Such funds usually hold a variety of government, municipal, and corporate debt obligations, preferred stock, money market instruments, and dividend-paying stocks.
Key Takeaways
- Income funds are mutual funds or ETFs that prioritize current income, often in the form of interest or dividend-paying investments.
- Income funds may invest in bonds or other fixed-income securities as well as preferred shares and dividend stocks.
- Income funds are often considered lower risk than funds that prioritize capital gains.
The Basics of Income Funds
Share prices of income funds are not fixed; they tend to fall when interest rates are rising and to increase when interest rates are falling. Generally, the bonds included in the portfolios of these funds are investment-grade. The other securities are of sufficient credit quality to assure the preservation of capital.
There are two popular types of high-risk funds that also focus mainly on income: high-yield bond funds that invest primarily in corporate junk bonds and bank loan funds that invest in floating-rate loans issued by banks or other financial institutions.
Income funds come in several varieties. The primary differentiation involves the types of securities they invest in to generate income.
Money Market Funds
Money market funds generally invest in certificates of deposit (CDs), commercial paper, and short-term Treasury bills. These funds are designed to be very safe investments aiming to maintain a low share price at all times, but they also tend to offer relatively low yields. While these funds don't carry the Federal Deposit Insurance Corporation (FDIC) insurance that bank products do, money market funds have traditionally provided a high degree of safety.
Bond Funds
Bond funds typically invest in corporate and government bonds. Government bond funds carry virtually no default risk and, therefore, can act as a safe haven for investors in times of uncertainty, but normally offer lower yields than comparable corporate bond funds. Corporate bonds carry the additional risk that the issuer may not be able to make principal or interest payments. As a result, they tend to pay higher interest rates to account for the additional risk. Corporate bond funds can be split into investment-grade bond funds and below-investment-grade, or junk, bond funds.
Equity Income Funds
Many companies pay dividends on their stocks. Funds invested primarily in stocks that pay regular dividends are known as equity income funds. These types of funds are especially popular among retirement-age investors that look to live off of the predictable monthly income generated from their portfolios. Historically, dividends have provided a significant percentage of a stock's total long-term return.
Other Income Funds
Other income-producing funds include those focused on real estate investment trusts (REITs), master limited partnerships (MLPs), and preferred stocks.
Example of an Income Fund
The T. Rowe Price Equity Income Fund has $17.51 billion in net assets as of Q1 2021 and seeks a high rate of growth through high dividend-paying stocks in combination with capital appreciation. The fund, which distributes payouts quarterly,paid a dividend of $0.18 per share on Dec. 14, 2020. The fund has performed relatively in line with its benchmark. An investment of $10,000 in the T. Rowe Price Equity Income Fund at inception in 1985 would be worth around $24,5100 as of Feb. 28, 2021. The LipperEquity Income Funds Average result for the same amount over the same period would be about $25,150.
FAQs
Fixed income mutual funds—commonly referred to as income funds—are a type of mutual fund that holds a basket of fixed income securities, such as government bonds, corporate bonds, international bonds (government and corporate), and money market instruments.
What is an example of an income fund? ›
Example of an Income Fund
The T. Rowe Price Equity Income Fund has $17.51 billion in net assets as of Q1 2021 and seeks a high rate of growth through high dividend-paying stocks in combination with capital appreciation. The fund, which distributes payouts quarterly, paid a dividend of $0.18 per share on Dec.
What is meant by income fund? ›
What is an Income Fund? An income fund is mutual fund or a ULIP (unit-linked investment plan) or any other type of investment that aims at generating an income stream for investors by investing in fixed income securities like government securities or gsecs/gilts, bonds, debentures, fixed deposits and the like.
What is an income fund vs. mutual fund? ›
An income fund is a mutual fund that focuses on providing investors with a consistent income stream from a portfolio of investments. There are several types of income funds, each with a different level of risk and return, depending in what they invest.
What is the goal of an income fund? ›
An income fund is a mutual fund or exchange-traded fund (ETF) that seeks to generate current income through dividends or interest payments. Some also provide an opportunity for capital appreciation.
What are the disadvantages of an income fund? ›
Performance Measurement: In most cases, income funds are not able to measure performance effectively. Especially dividends, the yield that is realized may overlook actual financial gain.
What is the highest paying income fund? ›
Best high-yield ETFs
| Exchange-traded fund (ticker symbol) | Dividend yield |
|---|
| Global X SuperDividend ETF (SDIV) | 10.9% |
| Invesco CEF Income Composite ETF (PCEF) | /.8% |
| iShares Preferred & Income Securities ETF (PFF) | 6.5% |
| SPDR Bloomberg High Yield Bond ETF (JNK) | 7.5% |
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The Exact Income Fund is a one-of-a-kind portfolio that guarantees exactly what your income will be in retirement from the moment you invest.
Do income funds pay monthly? ›
Income funds pay dividends at different frequencies – some monthly but some on an up to annual basis. Our 'Seeking retirement income' shortlist can help you find a fund for your portfolio that currently pays a monthly income and has a historic yield above 4%.
Which fund is best for monthly income? ›
Best Monthly Income Funds (MIPs) to Invest in 2024
| Funds Name | Returns(%) |
|---|
| DSP Balckrock Regular Savings Fund | 2.3 | 2.5 |
| HDFC Hybrid Debt Fund | -2.04 | 2.85 |
| ICICI Prudential MIP 25 | 4.7 | 7.6 |
| ICICI Prudential Monthly Income Plan | 5.5 | 7.6 |
6 more rowsIncome funds can be structured to pay out almost any yield through return of capital (ROC) distributions. An ROC distribution generally means that a fund pays out more than it earns in dividends, interest income and capital gains. The key benefit of ROC distributions is that they are not taxed in the year received.
What is the difference between an annuity and an income fund? ›
The difference is that with the annuity, your money is less accessible… but it also will provide you guaranteed income in retirement. With a mutual fund, your money is more accessible, but there is no guaranteed income.
Which is better growth or income funds? ›
However, growth funds offer the potential for larger long-term returns. Income funds, on the other hand, offer reduced risk but also smaller potential for gain when compared to growth funds.
What is the risk of income funds? ›
What Is Income Risk? Income risk is the risk that the income stream paid by a fund will decrease in response to a drop in interest rates. This risk is most prevalent in the money market and other short-term income fund strategies (versus longer-term strategies that lock in interest rates).
What do you mean by income fund? ›
An income fund pays out any interest and dividend income as cash into your account, usually on a regular basis. You can identify this type of fund with 'Inc' in its name. Income funds usually invest in shares in relatively stable companies that pay out regular dividends.
What are the characteristics of income funds? ›
Income funds generate income rather than capital growth. They achieve this by investing in dividend-paying stocks, bonds, and other securities that generate income. Income funds are a type of mutual fund that aims to provide investors steady income stream, prioritizing regular payouts over capital growth.
What is an example of income money? ›
- Earned income is made actively (like the paycheck you get from your job or the money you earn from your business), and unearned income is made passively (like collecting rent money from a property you own or making money on an investment).
What is an example of a growth and income fund? ›
Prominent and differing examples of growth and income funds include Fidelity Growth and Income (FGRIX) and Vanguard Growth & Income (VQNPX). They invest in growth stocks and value stocks with no exposure to bonds.
What is an example of an income investment? ›
You can choose from a variety of investment vehicles, including dividend-paying stocks, bonds, real estate investment trusts, money market funds, certificates of deposit (CDs), and more.
