As we know, finding the right balance between mutual fund investment and insurance is necessary for a secure financial future. Talking about investment specifically, there are a plethora of options available in the market. One such investment instrument that not many know about is the income funds.
Let us understand what are income funds and the factors you should consider before investing in it:
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What are Income Funds?
Popularly known as debt funds, income funds primarily serves the purpose of offering steady income to the investors. Here, you can usually make investments in money market instruments, government bonds, and corporate bonds. In other words, income funds are graded with credit-quality that assures the preservation of capital over time.
In pure investment terms, income funds prioritise your assets with substantial interest rates to generate a high dividend amount. Further, this amount is either invested or distributed among the investors.
Now that you have a brief overview of what income funds are, let us understand the factors you need to consider before investing in it:
1.Duration
Much like any other investment instrument, income funds can be invested for a short, medium or long-term as preferred. When it comes to short-term investment in income funds, the duration can be for a few days. Whereas, moderate to long-term income funds usually have a long investment horizon.
2.Expected Returns
If the investment horizon is more than a year, income funds generally offer higher returns. This is because it clubs the benefits of compound interest. Therefore, it is necessary to evaluate the expected returns on your income funds to ensure that you are investing in the correct plan.
3.Risk Involved
When it comes to income funds, the risks involved are associated with your holdings. In case you own a greater percentage of equity-oriented components, the risk will be high. But, since income funds invest in stock as well as the bond markets, it protects your investments against market risks.
4.Time
Staying invested for a long time in income funds will let you obtain high returns. So, it is wise to sell them after the completion of the maturity period. However, the right time to purchase income funds is when the interest rate is low. You can compare a few leading income funds online based on their existing interest rates before investing in it.
5.Tax-efficiency
When you stay invested in income funds for more than three years, you can avail Long Term Capital Gains Tax (LTCG). It is applicable at the rate of 10 percent without indexation and 20 percent with indexation benefit.
To conclude, income funds can be an ideal choice for investors who are looking for the regular flow of income later in the future (after retirement). If you want to invest in income funds and still unsure of how to do so, seek help from a financial expert who can efficiently evaluate the market scenario and manage your investment portfolio accordingly. Happy investing!