Income Funds

Income funds are a type of mutual funds, which generate a regular income for the investor. This class of mutual funds can be further divided into different types of income funds such as fixed income funds, monthly income funds, dividend income funds, growth and income funds, retirement funds, high yield income funds, etc.

In fixed income funds, the investor's funds are invested in less risky securities such as government securities, and bonds, which yield periodic returns. The returns from these are then distributed to the investor in the fund, after deducting charges towards administration. Effectively, the return received may seem lower than what the individual would get if such amounts were invested personally. However, the mutual fund manager has more information on the latest options available in the market, and therefore, it is able to ensure that the investor in such income fund receives the agreed amount regularly, without any interruptions. In addition, the investor is spared the effort of keeping track of when a particular security is maturing, or when a security needs to be renewed. Fixed income funds may pay monies on at regular intervals, such as monthly or quarterly.

Monthly income funds may or may not be fixed income funds. Therefore, the returns from such income funds may be either fixed, or may be variable. In the funds where the returns are variable, the mutual fund manager is at liberty to invest and pull out the funds from stock market, depending upon which options are available at any point of time in market. Therefore, in such variable monthly income fund, the returns may vary quite a bit from one interval to another. Dividend income funds are those funds in which shares of only those companies are held which regularly pay out some dividend. Here too, the quantum of dividend decreases because of the expenses of fund manager, but the fund manager has greater flexibility of pulling out the monies, and investing in companies that pay higher dividends.

Growth and income funds are those funds that plough back part of the income, and pay the balance as income. Retirement funds may be entail regular investment on the part of the investor over a long term, which is invested in stock markets. Eventually, adequate amounts are generated for fetching a fixed income for the investor. Alternately, the investor may invest a large sum at one go, and get a fixed income at regular intervals from it. The high yield income funds are those mutual funds that invest in the bonds of companies offering high interest rates. Obviously, these are risky investments as the companies that are offering higher interest rates have been unable to get funds from elsewhere, and are therefore offering such bonds. But high risks also mean high returns.

Open-ended income funds are those, which allow the investors to redeem their holdings at the end of each day if so desired, and like wise, allow the investor to purchase new units each day at the net asset value. Obviously, such redemption, and purchase is not possible with close-ended income funds, which are for a fixed duration. Because of almost steady income generation, income funds tend to increase in value when the interest rates fall, and lose in value when interest rate increase.

The American income funds invest in the usual fixed income generating low risk government securities, but apart from this, they also invest in fixed interest bearing bonds of companies, and mortgage backed securities. In countries like Canada, businesses can opt to convert their enterprise into such income trust, or income fund.