Top 10 Income Funds

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Income funds belong to the family of debt funds as they mainly invest in government bonds/securities and money market instruments like a certificate of deposits. It is a great option for investors who seek a steady income at present. In this article, we will cover the following topics, as well as talk about the top 10 income funds in India.
  1. What are income funds?
  2. Who should invest in income funds?
  3. What factors should you consider before investing in income funds?
  4. How can you evaluate income funds?
  5. What are the top 10 income funds in India?

1. Income Funds

Income funds are debt mutual funds that deliver you a steady income. They provide with a great opportunity for the investors who want to earn income in the present. The benefit of the diversification of funds is an added advantage as it allows for investment in equities and bonds alike. By investing in multiple asset classes like government securities, certificates of deposits (CD), and bonds, it prioritizes assets with higher interest rates. This generates a high dividend that is either invested or distributed to the investors.

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2. Who should Invest in Income Funds

Income funds mainly invest in government securities, corporate bonds, government bonds and money market instruments. Changes in interest rates impact the fund considerably. Hence, it is more suited for investors who are somewhat aggressive risk-seekers as well as those looking to invest long-term. It is 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.  

3. Factors to consider before Investing in Income Funds

a. Risks

The risk aspect of income funds depends on the type of holdings. If the equity percentage is more, the risk will also be more. Equities and bond prices have a negative correlation. Income funds investing in both stock and bonds markets provide for a hedge against market risks.

b. Returns

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

c. Tax-Efficiency

Do you belong to the 10% and 20% 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 20% with indexation benefit. In such cases, bank deposits make more sense. Income funds, however, provide increased returns after taxation to investors in the 30% tax slab.

d. Investment Horizon

There are some short-term income funds with just a few days’ investment horizon. Here, investors may just want a safe place to park their money at short notice. Medium to long-term debt funds, on the other hand, have a longer investment horizon.

e. Cost of the Fund

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 they mature or by selling them at the right time, the cost of the income funds to vary accordingly.   Income fund

4. How to evaluate Income Funds

a. Fund House Reputation 

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

b. Fund History

There is a temptation to choose a fund that has delivered well in the previous year. However, it is important to consider how long the fund has been in operation and how it has fared across market cycles.

c. Past Returns

An income fund that has performed well in the previous year may repeat the good work only if the market conditions remain similar. However, you can assess the fund manager’s skill based on returns generated in the past, and how he has handled volatility.

d. Financial Ratios 

There are several risk assessment tools that can track and evaluate income funds, some of which are listed below. Nowadays, investors can easily find this information on mutual fund websites as well as third-party sited.

i. Expense Ratio: The investors must consider the expense ratio of the fund (fee to the fund house) when they look at the overall cost and returns. They deduct this fee is from the returns you earn, though not more than 2.5% of the NAV as per the SEBI rules.

ii. Information Ratio: It is an indicator of the fund manager’s expertise and skill to deliver risk-adjusted returns above the benchmark. Information ratio is nothing but the benchmark return deducted from the overall portfolio return.

iii. Sharpe Ratio: Higher returns on paper doesn’t always imply a better performance. You can only assess an income fund’s performance when you judge the returns in line with the risks. So a greater Sharpe ratio indicates better return/performance against the risks per unit the fund undertakes. And you can only use this tool to compare different mutual funds.

iv. Standard Deviation: As the term suggests, standard deviation shows how much the fund returns have deviated from the average returns. For example, if the average return is 12% and the fund delivered 15%, there is a positive deviation.


5. Top 10 Income Funds

Income Funds are designed to generate income from interests on investments. It could be small to medium term bonds with a maturity period of 1-3 years or 3-5 years that give steady annualized returns, which make this fund less volatile. Therefore, investors must adjust and match their investment timeline with the maturity of these funds. Following is the list of best income funds for short-term investors.  
Fund Name Returns
1 year 3 years 5 years
SBI Regular Savings Fund 8.28 9.25 9.57
Aditya Birla Sun Life Treasury Optimizer Fund 7.38 9.16 9.40
ICICI Prudential Advisor Series – Dynamic Accrual Plan 7.27 8.64 8.93
ICICI Prudential Banking & PSU Debt Fund 6.84 8.54 8.79
Franklin India Income Builder Fund 6.79 8.52 8.79
Axis Regular Savings Fund 6.78 8.49 8.70
HDFC Medium Term Opportunities Fund 6.76 8.35 8.50
BNB Paribas Flexi Debt Fund 6.71 8.30 8.22
Kotak Corporate Bond Fund – Standard Plan 6.35 8.27 8.19
BNB Paribas Corporate Bond Fund 6.31 8.16 8.16
  The above income funds are chosen based on their previous years’ returns. Therefore, it also proves that they are a good steady source of financial income for investors looking for current income generation as opposed to a long-term gain.  

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