With interest rates falling, investors are busy looking at opportunities, which can offer them high interest yields. One choice could be income funds.

What are income funds in India?

Income funds are type of debt mutual funds that invest in a number of instruments for long term investment. Income funds as the name suggests, are funds that invest in a manner, so as to provide income for the investor.

The instrument that could choose include government securities, certificates of deposits, corporate bonds, fixed deposits and money market instruments. Since they invest for the longer term, the chances of interest rate and credit risk is very high.

Who should consider investing in Income funds?

Individuals who are looking for moderate to high risk with 8 to 13 per cent annualized returns can consider these instruments. These can be best alternative to fixed deposits as they are more tax efficient. As of now, bank fixed deposits are providing around 7.5-8.5 per cent interest on their deposits.

Investing in income funds would depend on the financial goal of an individual. Say for example, if you are a retired individual and looking for monthly income you can consider investing in funds with regular dividend payouts. If you are young and risk capacity is high you can consider aggressive funds.

Where do income funds invest?

Income funds investment pattern would depend on the objective of the scheme. The funds could be aggressive as well as very conservative.

These funds may invest in debt, as well as equities, but, mostly they would tend to be towards good quality debt.

Fund managers also look to invest in solid companies, where the dividend yields are really high.

4 reasons why you should consider investing in Income funds

1) Income funds are tax efficient for individuals falling in 20 per cent and 30 per cent.

2) Income funds are highly flexible. If invested systematically, you can withdraw the same thus providing regular income.

3) Such funds can be of great help when interest rates are falling.

4) These funds are highly liquid and can be withdrawn without lock in period.

One point to note, is that income funds need not necessarily distribute the amounts earned at regular intervals. One needs to study the distribution pattern and the objective of the fund very clearly.

Conclusion

We wish to emphasize once again that like most other mutual fund schemes, returns are not assured. Bank deposits, company deposits and small savings schemes are more reliable in terms of returns.

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