Income Funds: Features, Risks, and Returns – Simplified Guide
Mutual Funds have become a popular investment choice for many Indians. Over time, many types of mutual fund schemes have been launched for different types of investors. But because of this variety, some people feel confused while choosing the right one. To invest smartly, it’s important to understand the different kinds of mutual funds. In this article, let’s learn about Income Funds – what they are, how they work, and whether they suit your needs.
What Are Income Funds?
Income Funds are a type of debt mutual fund. These funds invest your money in instruments like debentures, corporate bonds, and government securities, usually for longer periods. As per SEBI (Securities and Exchange Board of India), income funds are those debt funds that have a Macaulay Duration of 4 years or more.
There are two types of Income Funds in India:
- Medium to Long Duration Fund: Duration between 4 to 7 years
- Long Duration Fund: Duration more than 7 years
How Do Income Mutual Funds Work?
The goal of the fund manager is to give you steady returns whether the interest rates are going up or down. This is done in two main ways:
- Interest Income: By holding bonds or securities till they mature
- Capital Gains: By selling these instruments in the market when their value increases
Usually, fund managers choose safer, high-rated bonds with low risk. Over time, these funds have given better returns than bank fixed deposits, and also offer better liquidity.
Who Should Invest in Income Funds?
Income funds are ideal for investors who:
- Have low to medium risk appetite
- Want regular income
- Are looking for an FD alternative with potentially higher returns
These funds are good for conservative investors who want some market exposure without taking high risk.
Main Features of Income Funds:
- Expense Ratio: This is the fee charged by the fund house to manage your money. SEBI has capped it at 2.25%. Since income funds give moderate returns, a lower expense ratio is better for investors.
- Risks Involved:
- Credit Risk: The risk that the bond issuer may not repay your money
- Interest Rate Risk: The risk of bond values going up/down due to changes in interest rates
- Sometimes, fund managers may invest in lower-rated bonds to earn higher returns, but this also increases risk.
- Returns: Income funds can give returns in the range of 7-9%, especially when interest rates are falling.
When to Invest?
- Income funds are suitable if you’re thinking of investing in a long-term fixed deposit.
- They are best when interest rates are falling.
- You can consider exiting when interest rates start rising.
Taxation on Income Funds:
From 1st April 2023, new rules apply to the taxation of debt mutual funds:
After 1st April 2023:
- All gains from income funds are taxed as short-term capital gains – based on your income tax slab.
- No indexation benefit (adjustment for inflation) is available.
Before 1st April 2023:
- If held less than 36 months: Taxed as STCG (short-term) – as per slab rates
- If held more than 36 months: Taxed as LTCG (long-term) – 20% with indexation benefit
Note: For funds bought before 1 April 2023 but sold after that, special tax rules apply. For LTCG, a flat 12.5% tax is applicable without indexation.
Key Benefits of Income Funds:
- Better than FDs: Usually give better returns than fixed deposits (FDs). But remember – income funds carry some risk, while FDs are safer.
- Easy Liquidity: No lock-in like FDs. You can withdraw money when needed. Just watch out for any exit load (small fee on early withdrawal).
Final Note:
The purpose of this article is to spread financial awareness and help you understand Income Funds in a simple way. This is for education only, not a recommendation to invest in any particular product. Let me know if you’d like a short version for social media or a visual post!
