What Is An Income Fund?

An income fund is a kind of mutual fund or exchange-traded fund (ETF) that focuses on generating regular income, either monthly or quarterly, rather than capital gains or growth. These funds typically invest in a mix of government, municipal, and corporate debt securities, preferred stock, money market instruments, and dividend-paying stocks.

The Basics

Income funds’ share prices are not constant; they typically decline when interest rates rise and rise when interest rates fall. In general, the bonds held in these funds are of investment-grade quality. The other securities are also of good credit quality, ensuring the protection of capital.

Two common high-risk funds that mainly target income are high-yield bond funds, which invest in corporate junk bonds, and bank loan funds, which invest in floating-rate loans from banks or financial institutions.

There are different types of income funds that invest in various securities to generate income.

Example of an Income Fund

The T. Rowe Price Equity Income Fund has $17.51 billion in net assets as of Q1 2021. It aims for high growth by investing in high dividend-paying stocks and capital appreciation. The fund pays dividends quarterly, with a payout of $0.18 per share on Dec. 14, 2020. It has performed similarly to its benchmark. An initial investment of $10,000 in 1985 would be valued at around $24,100 as of Feb. 28, 2021. The Lipper Equity Income Funds Average for the same period would be approximately $25,150.