What is an Income Fund?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 24 May 2020
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Sometimes referred to as bond funds, income funds are mutual funds that hold a variety of debt instruments for the specific purpose of generating earnings from interest off those holdings. An income fund is not focused on building up any large reserves of assets over time, but on generating an ongoing and steady income for the owner of the fund. Since the focus is not on creating capital gains, this type of fund will tend to include investments that generate interest income on an ongoing basis, such as bond issues or corporate debentures.

An income fund can be established to benefit an individual, business, or any other type of legal entity. The selection of investments to include often depend on the rate of return that can be reasonably expected from each asset, when the return is earned and credited to the account, and how long the asset will take to mature. With careful planning, it is possible to structure the fund so that it is a combination of bonds with different maturity dates, all providing interest income at various times throughout the year. The continuing flow of income is especially important if the fund is structured to issue payments on a regular basis, such as monthly or quarterly.

One of the benefits of investing in a mutual fund that is set up as an income fund is the opportunity to create a consistent source of income or revenue. An arrangement of this type can be ideal for inclusion when arranging a family corporation, since it can help insure that each child covered in the fund does have consistent financial support from month to month, assuming that the securities owned by the fund continue to perform at projected levels. Since the disbursements are based on the amount of interest or return earned by the holdings in the fund, qualified family members have a guaranteed source of income that is present even if they suffer unemployment or are unable to work for a period of time. From this perspective, the income fund can provide a great deal of peace of mind as well as a degree of financial security.

While an income fund is often known as a bond fund, this is somewhat misleading. It is certainly possible to include other types of investments in this sort of mutual fund arrangement. For example, stocks that pay dividends on a regular basis would be ideal for an income fund, and are in fact often included in this type of financial investment strategy.


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