Understanding Income Funds: Basics and Features | Motilal Oswal

Understanding Income Funds: Basics and Features


  • Income funds aim to generate a steady income for investors, irrespective of market interest rates.
  • To generate a steady cash flow, these funds usually invest in debt, securities, fixed-income instruments, real estate, and such.
  • The fund manager invests in securities with high credit ratings and established financial records.
  • Investors gain regular cash flows in the form of dividends and coupon payments while also enjoying the benefits of capital appreciation.
  • Therefore, income funds are best suited for risk-averse investors who cannot track the financial markets regularly.

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What are the Different Categories of Income Funds?

Income funds can be broadly classified into three categories based on the type of securities they invest in. These categories are given below:

  • Bond funds: Bond funds invest in debt instruments issued by sovereign and local government bodies and corporations. Fund managers invest in debt instruments of different maturities for effective duration mapping, which reduces the payback period and risk of liquidity.
  • Dividend funds: Dividend funds invest in the equity stock of cash-rich companies that have a high dividend yield, i.e., that pay investors regular dividends. These funds also have a high potential for capital appreciation, which makes them all the more attractive as an asset class.
  • Real estate investment trusts (REITs): These investment funds are focused on commercial and housing property investments. They generate steady rental income, a portion of which is distributed to shareholders as dividends, and also hold the potential for capital appreciation, as the real estate markets grow.

How Do I Choose a Good Income Fund?

Choosing a good income fund that fits your risk appetite can be tricky. As an investor, you should employ your due diligence to ensure that there are no hidden costs to investing in these funds. Here are a few factors you should consider while choosing an income fund:

  • Entry/Exit load: It's the amount you pay when you enter or exit a fund. It is usually a small percentage of the amount you are going to invest in that fund.
  • Expense ratio: The expense ratio is the percentage of your income that the fund manager takes as asset management fees. This is always a percentage of the net income that is generated from your investments.
  • Risk-return: Risk and return measure the returns a fund manager can gain on every unit of risk taken. A high ratio indicates high returns per unit of risk.


  • Income funds offer a reliable source of income for investors with the potential for capital appreciation.
  • Investors can make informed decisions by learning about the types of income funds available and considering important factors such as expenses and risk-return profiles.


Related Blogs: Demystifying Class C Shares: Understanding the Differences and Benefits | Why are Mutual Funds and Compound Interest a Winning Combination | What is Counterparty Risk? Understand Here! | What is a Blend Fund


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