Mutual Funds is not only an investment or a onetime business, it goes on and gets managed professionally on a large scale. And when it comes to professional management, the best example of the type of mutual fund to invest in is the “Income Funds”. The risk involved in Income Funds differs from a fund to fund. It can be highly volatile or it can be pretty stable too. While talking about the Income Funds, the important question to ask is:
Why does one need to invest in Income Funds at all?
Answer – As the name suggests the word “income”, income funds can be chosen to diversify your portfolio. Generally, diversification helps in mitigating the risk to a larger extent. Income Funds are diverse i.e. there is a lot to choose from these funds. Moreover, the funds can invest in both equity and debts as well. Even the investment can be merged up into the combination of both equity and debts. Income Funds are also known to invest globally and thus have a greater reach. Having said that, let’s explore more about the income funds in this article. We will also delve into details about various kinds of income funds to clarify the case further.
Let’s answer this first: What is an Income Fund in simple terms?
Income Fund falls in one of the many categories of Mutual Fund that strongly focuses on the “current income” (which can be considered as a dividend or interest) on the current income. The investors can either choose to go for divided short-term capital for short-term spending or can go for long-term funding distribution. Example – Retirement Funding. As we see, the prospect of income fund is very flexible.
Any investor has a choice to choose in between individual securities and managed investment funds.
Types of Income Funds:
1. Fixed Income Funds:
As the name suggests fixed, we can figure out that the strategy or funding has a fixed rate of interest along with a fixed maturity. Since the types of security vary widely in the case of income funds, an investor usually has a wide spectrum of choices to choose from. As there’s a fixed amount of interest rate involved, it’s pretty easy to calculate the annual and hence total return with which, the total of maturity amount can also be calculated easily in the case of fixed income funds. This kind of funding is preferred by both stable and aggressive investors differing on the quotient of the type of security.
2. Bond Funds:
Another kind of funding is introduced as the bond funds which is considered as the most common type of funding. Bond Funds offer varying risk as they further can be invested in various places. Considering the safest case, the Government Bond Fund is considered as the most conservative one. Since the Government Funds invest in the treasury (US Based) a slightly safer option. On the other hand, some prefer to invest in Government Security Agencies which generally turn out to provide a higher return than the former choice.
One thing to keep in mind while making an investment in the Bond Income Fund that the total maturity amount is never fixed. With the fluctuations increasing in the secondary market, the amount keeps on changing.
Tax-Free Returns: The municipal bond-funded investment offers a tax-free return to its investors which actually saves a lot more money than other investment options. On the other hand, the corporate bond-funded investment would deduct a tax on the matured amount but on the positive side, it gives a better return on the investment.
3. Specialty Fixed Income Funds:
Not all the income funds invest in Government Bonds and Municipal Bonds. The Specialty Fixed Income category of Income Funds is the one that invests in the senior secured loans which are fully and completely collateralized I.e. the loan is secured by the asset pledged by the borrower. Such kind of fund investments falls on the safer side of the scale of risk.
The liquidity is also high in these funds. In fact, the funds are available to access on a monthly or quarterly basis. Another example of a Specialty Fixed Income Fund is the Mortgage Backed Fund. What happens, in this case, is that the investor becomes a shareholder whenever a borrower borrows loan amount from banking institutes against the mortgage. The mortgage put forward by the borrower acts as a security for his loan amount which makes the specialty fixed income to fund further freer from risk.
4. Stock Income Funds:
The Stock Income Funds are different and somewhat lesser risky than the bond fund investment type. In the Stock Income Fund, the investor gains a steady dividend on a monthly or quarterly basis which is mostly 1-2% higher in terms of interest rate than the government bonds.
It all comes falling to one question again, the requirement of the user. Having said that, a proper research on the risk associated as well as the methodology of the professional management is very much needed before making any kind of investment. It takes just a couple of minutes to get updated on the current news which is the key to be a smart investor.
Nonetheless, the bottom line for an income fund investment is the conservativeness you’d prefer in your return. The rest does depend on what you pick.