What are Income Funds?

Income funds are mutual funds that focus on acquiring monthly or quarterly income for the investor. Other types of mutual funds tend to focus on capital growth instead of income or opt for a combination of both. Often, people invest in income funds with the intention of keeping them for regular income over a long-term period instead of selling their shares in the future.

Understanding mutual funds requires getting a handle on how mutual funds work. A mutual fund is unlike an individual stock or bond investment made by a sole investor. It pools the investments of many people together, with each one making an investment that accounts for only a small percentage of the fund's holdings. Each mutual fund has a manager, who takes this pooled investment and purchases stocks and bonds with it; he may purchases other types of securities as well.

When a person invests in an income fund, he gets a percentage of its total earnings. These funds allow investors to make an initial investment of only a couple of thousand USdollars or less yet enjoy the benefits of owning a part of a very large fund portfolio. Often, the cost for participation is less than that of buying many different stocks and bonds. Additionally, the investor can leave the tracking of the fund’s holdings entirely to the mutual fund manager.

Income funds are often categorized as either balanced- or equity-income funds. A balanced fund often strives for about 50-percent investment in stocks and 50-percent investment in bonds. On the other hand, equity-income funds often have dividend-paying stocks as their primary holdings. Though these types of income funds may have different holdings, both focus on generating and maintaining a high level of current income and preserving capital rather than capital growth.

When investors compare income funds to money market or bond funds, income funds often come out ahead. They typically produce higher returns than money market and bond funds. Also, they aren’t considered very risky, as they tend to invest in companies that are both established and creditworthy. The companies they choose to invest in can generally be counted on to provide dividends and interest payments on a consistent basis. However, prices for shares of income funds fluctuate right along with interest rates; they fall when interest rates fall and rise when they go up.