Updated on: Oct 17th, 2021
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3 min read
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:
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.
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% | |
SBI Magnum Income Fund Regular Growth | 8.82% | 9.07% | |
Aditya Birla Sun Life Income Fund Regular Plan Growth | 8.82% | 9.07% | |
Canara Robeco Income Fund Regular Plan Growth | 8.82% | 9.07% | |
HDFC Income Fund Growth | 8.82% | 9.07% | |
UTI – Short Term Income Fund – Regular Plan – Growth Option | 8.82% | 9.07% |
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.
The following are some of the features of fixed maturity plans:
The following parameters can be used to evaluate 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.
The following are the most significant advantages of investing in income funds:
Income funds are a type of debt funds that invest in government bonds/securities and money market instruments. They prioritize interest rates and creditworthiness and generate high dividends. Investors interested in regular income over wealth creation opt for these funds. Check for investment horizon, risk, returns, cost, and evaluation parameters before investing. Dividends are taxed as per income tax slab, and capital gains are taxed based on holding period and rate.