What is an income fund?
An income fund is a mutual fund or exchange-traded fund (ETF) that focuses on current income, usually every month or three months, rather than cash gains or appreciation. These kinds of funds usually hold different kinds of loans from governments, cities, and businesses, as well as preferred stock, money market instruments, and stocks that pay dividends.
Income Fund: What You Need to Know
Income fund share prices don’t stay the same. They tend to go down when interest rates go up and up when interest rates go down. The notes that these funds hold are usually of investment-grade quality. The other securities have enough credit quality to make sure that cash is kept safe.
High-yield bond funds and bank loan funds are two popular types of high-risk funds that focus on income. High-yield bond funds invest primarily in corporate junk bonds, while bank loan funds invest in floating-rate loans from banks and other financial institutions.
There are different kinds of income plans. What sets them apart are the kinds of securities they buy to make money.
Income Funds for money markets
Most of the time, money market funds put their money into commercial paper, short-term Treasury bills, and certificates of deposit (CDs). The goal of these funds is to keep the share price low at all times so that they are very safe investments, but they also tend to have low returns. Money market funds have always been very safe, even though they don’t have the Federal Deposit Insurance Corporation’s (FDIC) insurance that bank products do.
Income Funds for Bonds
Bond funds usually buy notes from companies and the government. Government bond funds rarely go wrong, so they can be a haven for investors during times of uncertainty. However, they usually have lower yields than similar business bond funds. There is an extra danger with corporate bonds, which is that the issuer might be unable to pay the principal or interest. Because of this, they usually pay more in interest to cover the extra risk. There are two types of corporate bond funds: investment-grade bond funds and below-investment-grade, or junk, bond funds.
Income Funds for Equity
People can get rewards on a lot of companies’ stocks. Equity income funds are primarily invested in stocks that pay regular dividends. These funds are top-rated by investors close to retirement who want to live off their stocks’ steady monthly income. Over the long term, dividends have historically contributed much of a stock’s total gain.
Other Income Funds
Real estate investment companies (REITs), master limited partnerships (MLPs), and preferred stocks are other types of funds that can bring in money.
What an Income Fund Looks Like
As of the first quarter of 2021, the T. Rowe Price Equity Income Fund had net assets of $17.51 billion. Its goal is to achieve a high growth rate by investing in stocks that pay high dividends and increase in value. The fund gives out dividends every three months, and on December 14, 2020, it gave out $0.18 per share. The fund’s performance has been about the same as its standard. 1 In 1985, putting $10,000 into the T. Rowe Price Equity Income Fund would have been worth about $24,5100 on February 28, 2021. The average return for the same amount of money over the same period would be about $25,150 with Lipper Equity Income Funds.
Conclusion
- Income funds, whether mutual or exchange-traded, focus on short-term income. Usually, they do this by investing in things that pay interest or dividends.
- Aside from preferred shares and dividend stocks, income funds can also put their money into bonds and other fixed-income assets.
- A lot of the time, people think that income funds are safer than capital gains funds.
