An income fund is a managed investment scheme that seeks to generate an income stream by investing into assets that pay dividends or make interest payments. The funds can be invested into a broad range of investments including bonds, equities, hybrids, cash or even real estate investment trusts (REITs).
Income funds can take a range of risk by investing in conservative to risky investments. Some income funds only invest in securities from established, creditworthy companies that make consistent dividend or interest payments, making them relatively conservative investments. Other funds invest in riskier investments like REITs and sub-investment grade bonds,for higher yields than other, more conservative funds.
As with other funds, one of the greatest advantages of income funds is diversification. However, the inclusion of both equities and bonds in the same fund can result in some income funds providing a higher level of diversification. Equities and bond prices generally have a negative correlation which means that when equity prices go up, bond prices tend to go down and vice versa. Because some income funds invest in both the stock and bond markets, income funds usually provide an added hedge against market risk.
Income funds are popular for retirees or people entering into retirement as they seek to rely on an income stream to fund their living expenses. For these investors, it is important that they focus on income funds that not only provide a regular and reliable income, but that also provide enough capital growth to allow that income to grow with the cost of living.