Top 10 Income Funds

Income funds belong to the category of debt funds. They predominantly invest in government bonds/securities and money market instruments like a certificate of deposit. We have covered the following in this article:


Introduction to Income Funds

Income funds are a class of debt mutual funds that invest in corporate bonds, government bonds and money market instruments. The portfolio is managed based on interest rates movements keeping in mind the creditworthiness. They are investment graded with credit quality, assuring capital preservation. It prioritises assets with higher interest rates. This generates a high dividend that is either invested or distributed to the investors.


Top 10 Fixed Maturity Plans

The table below shows the top-performing FMPS:

Fund 3-Year Performance 5-Year Performance Link
SBI Magnum Income Regular Bonus 8.82% 9.07% Invest now
SBI Magnum Income Fund Regular Growth 8.83% 9.07% Invest now
Aditya Birla Sun Life Income Fund Regular Plan Growth 8.82% 9.07% Invest now
Canara Robeco Income Fund Regular Plan Growth 8.82% 9.07% Invest now
HDFC Income Fund Growth 8.82% 9.07% Invest now
UTI – Short Term Income Fund – Regular Plan – Growth Option 8.82% 9.07% Invest now

Who Should Invest in Income Funds?

Income funds mainly invest in government bonds, corporate bonds, Certificate of deposits, and money market instruments. This helps in generating interest income by holding the investment until maturity or making gains by selling them in the debt market if the returns on the investment are comparatively better. Changes in interest rates impact the fund considerably.

Hence, it is most suited for investors who are willing to take risk aggressively and as well as those looking to invest with a long-term horizon. Therefore, it is vital to plan and time your entry and exit from these funds judiciously, for the same reason. These funds focus on generating income for the investors rather than wealth creation. As such, they are a great source of financial gain for investors looking for regular and reliable income.


Factors to Consider Before Investing in Income Funds

The following are some of the features of fixed maturity plans:

  1. Risks
  2. The risk aspect of income funds depends on the type of holdings. If the equity component is more, then risk will also be more. Equities and bond prices have a negative correlation. Income funds invest in both stock and bond markets and provide for a hedge against market risks. Income funds carry interest rate risk and credit risk.

  3. Returns
  4. Income funds deliver the benefits of compounded interest if the investment horizon exceeds one year. This has been the trend for the last 10 years.

  5. Tax-Efficiency
  6. If you are in the 20% and 30% tax slab, then you should know that income funds held for more than three years are subject to long-term capital gains (LTCG) tax. It is taxable at the rate of 20% with indexation benefit. However, income funds provide increased returns after taxation to investors in the 30% tax slab.

  7. dInvestment Horizon
  8. There are some short-term income funds with an investment horizon of just a few days. Here, investors may want a safe place to park their money for a short period. Medium to long-term debt funds, on the other hand, have a longer investment horizon.

  9. Cost of the Fund
  10. The best time to invest in income funds is when there is going to be a fall in interest rates since they make money by either holding the instruments until maturity or by selling them at the right time, in the debt market if the returns are positive.


How to Evaluate Income Funds

The following parameters can be used to evaluate income funds:

  1. Fund House Reputation
  2. While the asset management company faces many risks, nothing could be more significant than the loss of reputation. This is because a first-time investor almost always stumbles to mutual fund investment through word of mouth.

  3. Fund History
  4. There is a temptation to choose that fund that has delivered excellent returns in the past. However, it is essential to consider how long the fund has been in operation and how it has fared across market cycles.

  5. Past Returns
  6. An income fund that has performed well in the previous year may emulate the good returns only if the market conditions remain favourable. However, you can assess the fund manager’s skills based on past performances and how well he/she has coped with volatility.

  7. Financial Ratios
  8. There are several risk assessment tools to track and evaluate the performance of income funds. Nowadays, investors can easily find this information on mutual fund websites as well as third-party sites.


Taxation of Income Funds

The dividends offered by these funds are added to your overall income and taxed as per your income tax slab. This is per the amendments made in the Budget 2020, wherein it was decided to implement the classical way of taxing dividends. Before that, the dividends were made tax-free in the hands of investors as fund houses paid DDT.

Since income funds are a class of debt funds, the capital gains offered by these funds are taxable by following the rules of taxation of any other debt fund. Short-term capital gains (holding period of shorter than 36 months) are added to your overall income and taxed as per the income tax slab you fall under. Long-term capital gains (holding period of longer than 36 months) are taxed at a rate of 20% after indexation.


Advantages of Income Funds

The following are the most significant advantages of investing in income funds:

  1. Income funds offer a higher degree of liquidity, as there is no lock-in period. You can sell your fund units at any time.
  2. Fund managers actively seek opportunities to optimise the return on investment.
  3. These funds are known to provide much higher returns than bank deposits. Therefore, you may consider investing your surplus money in these funds.
  4. Long-term capital gains are taxed after indexation.