What is an Income Fund
19 Oct 2021

What is an Income Fund

Enjoy regular returns with Income Mutual Funds

Key Takeaways

  • Income Fund is a class of debt Mutual Funds.
  • Fund Managers invest in fixed income securities to earn regular returns.
  • Income Funds typically offer higher returns than fixed deposits.
  • If not adequately managed, interest rate risk and credit risk can follow Income Funds.
  • Income Funds help you diversify your portfolio and mitigate the inherent investment risks.

The highly versatile nature of Mutual Funds provides investors with numerous opportunities to earn excellent returns. With time, however, you may wish to diversify your investment portfolio to compensate for aggressive equities. One way to do so is to invest in debt funds, which are low-risk mutual funds yielding steady returns. An Income Fund is a type of mutual fund that many investors choose. Learn more about Income Fund meaning in this article.

What is an Income Fund?

An Income Fund is a type of Debt Mutual Fund that invests in debt instruments like corporate bonds, government securities, commercial papers, certificate of deposit, etc. It is typically a long-term investment instrument that provides investors with a regular, fixed income instead of assisting with corpus creation through investments.

How Does an Income Fund Work?

Like most mutual funds, Income Funds are primarily managed by Fund Managers. Regardless of increasing or declining interest rates, these funds aim to generate good returns. Fund managers Managers can either hold the debt instruments until maturity to generate interest income or sell the instruments when the prices increase to book capital gains.

Fund managers typically choose highly rated Income Funds investing in debt instruments. This makes the investment secure, but the returns rate may be lower. However, Income Funds outperform regular bank deposits, are more flexible and highly liquid. This makes the investment secure, but the returns rate may be lower.

Benefits of Income Funds

Portfolio Diversification

Income Funds invest in multiple debt type funds, including money market instruments, corporate or government bonds, etc. They are a lucrative addition to your investment portfolio due to their highly safe and liquid nature.


Income Funds aim to generate income for investors, making them an alternative, additional income source for most investors.


Income Funds are also an excellent alternative to bank fixed deposits in that you can earn higher interest rates on your investment.


While you have to stay locked in and bear penalties on premature withdrawals on fixed deposits, Income Funds do not come with a lock-in period, nor do you have to worry about penalties.

Things to Consider


Income Funds carry interest rate and credit risks. Fund Managers may invest in securities that generate better returns at the expense of credit quality, exposing your investment portfolio to further risks.


Although most Income Funds do not have a lock-in period, you may have to pay an exit load. Fund Managers also levy a commission, which eats into your profit. Moreover, returns on debt funds are relatively lower. As such, you should check the expense ratio. A higher expense ratio means even lesser returns.


If you fall under the 20 per cent and 30 per cent tax slab and hold Income Funds for more than three years, your gains are subject to the Long-term Capital Gains (LTCG) tax. LTCG is taxable at 20 per cent with the benefit of indexation.


As an investor with a low-risk tolerance looking for a regular income source, you can add Income Funds to your portfolios. Fund Managers actively manage the fund to ensure higher returns than a standard deposit account.

Download digibank and start the simple process of investing in debt funds.

*Disclaimer: This article is for information only. We recommend you get in touch with your income tax advisor or CA for expert advice.