What Is an Income Fund?
An income fund is a type of mutual fund or exchange-traded fund (ETF) that emphasizes current income, either on a monthly or quarterly basis, as opposed to capital gains or appreciation. Such funds usually hold a variety of government, municipal, and corporate debt obligations, preferred stock, money market instruments, and dividend-paying stocks.
Key Takeaways
- Income funds are mutual funds or ETFs that prioritize current income, often in the form of interest or dividend-paying investments.
- Income funds may invest in bonds or other fixed-income securities as well as preferred shares and dividend stocks.
- Income funds are often considered lower risk than funds that prioritize capital gains.
The Basics of Income Funds
Share prices of income funds are not fixed; they tend to fall when interest rates are rising and to increase when interest rates are falling. Generally, the bonds included in the portfolios of these funds are investment-grade. The other securities are of sufficient credit quality to assure the preservation of capital.
There are two popular types of high-risk funds that also focus mainly on income: high-yield bond funds that invest primarily in corporate junk bonds and bank loan funds that invest in floating-rate loans issued by banks or other financial institutions.
Income funds come in several varieties. The primary differentiation involves the types of securities they invest in to generate income.
Money Market Funds
Money market funds generally invest in certificates of deposit (CDs), commercial paper, and short-term Treasury bills. These funds are designed to be very safe investments aiming to maintain a low share price at all times, but they also tend to offer relatively low yields. While these funds don't carry the Federal Deposit Insurance Corporation (FDIC) insurance that bank products do, money market funds have traditionally provided a high degree of safety.
Bond Funds
Bond funds typically invest in corporate and government bonds. Government bond funds carry virtually no default risk and, therefore, can act as a safe haven for investors in times of uncertainty, but normally offer lower yields than comparable corporate bond funds. Corporate bonds carry the additional risk that the issuer may not be able to make principal or interest payments. As a result, they tend to pay higher interest rates to account for the additional risk. Corporate bond funds can be split into investment-grade bond funds and below-investment-grade, or junk, bond funds.
Equity Income Funds
Many companies pay dividends on their stocks. Funds invested primarily in stocks that pay regular dividends are known as equity income funds. These types of funds are especially popular among retirement-age investors that look to live off of the predictable monthly income generated from their portfolios. Historically, dividends have provided a significant percentage of a stock's total long-term return.
Other Income Funds
Other income-producing funds include those focused on real estate investment trusts (REITs), master limited partnerships (MLPs), and preferred stocks.
Example of an Income Fund
The T. Rowe Price Equity Income Fund has $17.51 billion in net assets as of Q1 2021 and seeks a high rate of growth through high dividend-paying stocks in combination with capital appreciation. The fund, which distributes payouts quarterly,paid a dividend of $0.18 per share on Dec. 14, 2020. The fund has performed relatively in line with its benchmark. An investment of $10,000 in the T. Rowe Price Equity Income Fund at inception in 1985 would be worth around $24,5100 as of Feb. 28, 2021. The LipperEquity Income Funds Average result for the same amount over the same period would be about $25,150.
FAQs
Example of an Income Fund
The T. Rowe Price Equity Income Fund has $17.51 billion in net assets as of Q1 2021 and seeks a high rate of growth through high dividend-paying stocks in combination with capital appreciation. The fund, which distributes payouts quarterly, paid a dividend of $0.18 per share on Dec.
What is an income fund simple definition? ›
What is an income fund? An income fund is a mutual fund that focuses on providing investors with a consistent income stream from a portfolio of investments. There are several types of income funds, each with a different level of risk and return, depending in what they invest.
What are the benefits of income funds? ›
Income funds generate regular income for investors by investing in fixed-income securities such as bonds, Treasurys, certificates of deposit (CDs), preferred shares, and money market instruments. Many use these funds to provide a steady income through interest and dividends while preserving their capital.
How do income funds pay out? ›
Income funds pay any profits directly to the investor as cash. These funds will use the initials 'Inc' for income or 'Div' for dividend in the fund name.
What type of fund is an income fund? ›
Fixed income mutual funds—commonly referred to as income funds—are a type of mutual fund that holds a basket of fixed income securities, such as government bonds, corporate bonds, international bonds (government and corporate), and money market instruments.
What is a fund example? ›
A fund is a pool of money set aside for a specific purpose. The pool of money in a fund is often invested and professionally managed in order to generate returns for its investors. Some common types of funds include pension funds, insurance funds, foundations, and endowments.
What is the risk of income funds? ›
Income risk is the risk that the income stream paid by a fund will decrease in response to a drop in interest rates. This risk is most prevalent in the money market and other short-term income fund strategies (versus longer-term strategies that lock in interest rates).
What are regular income funds? ›
Income funds are a class of mutual funds that prioritise providing a constant regular income for investors. These funds focus on generating regular income by investing in high dividend-generating stocks, certificate of deposits, government securities, money market instruments, corporate bonds, and debentures.
What is a monthly income fund? ›
A monthly income plan is a type of mutual fund. The objective is to preserve capital and generate cash flow by investing in a mix of debt and equity securities. As such, they provide an alternative, steady income stream to investors who need it, including retirees. This comes in dividends or interest payments.
What is private income fund? ›
Private income funds create income by investing in assets such as bonds, real estate, and dividend-paying equities.
Six Considerations for Evaluating Multi-Asset Income Funds
- Natural yield vs return of capital. ...
- Risk-managed vs risk-inefficient. ...
- Obvious vs less-obvious equity income. ...
- Balanced equity style vs value biases. ...
- Global vs home-country biased. ...
- Diversified vs big concentrations.
The Fund seeks to deliver high current income through a diversified portfolio of global high-income securities that may span the capital structure and credit spectrum, including high-yield bonds from the U.S. and developed and emerging markets, as well as preferred and convertible securities.
Do income funds pay monthly? ›
In fact, many income funds pay a stable monthly or quarterly distribution. It's important to know, however, that unlike GICs, income fund distributions are not guaranteed and can change at any time.
How do I withdraw money from a fund? ›
To withdraw money from mutual funds, submit a redemption request to the fund house. The process involves filling out a redemption form, specifying the amount you wish to withdraw. Keep in mind that certain funds may have exit loads.
How do fixed-income funds work? ›
Fixed-Income securities provide investors with a stream of fixed periodic interest payments and the eventual return of principal at maturity. Bonds are the most common type of fixed-income security. Different bonds have different term lengths depending on how long the issuer wishes to borrow for.
Does Vanguard have an income fund? ›
Vanguard LifeStrategy® Income Fund is one of four Vanguard funds that use target allocation as a simplified approach to meeting investors' different objectives and risk tolerances.
