How does an equity income fund work?
An equity-income fund is a mutual fund that invests in stocks that pay dividends. These funds are a mixture of a variety of different income investments. Generally, they invest in securities from well established, creditworthy companies that pay dividends consistently. However, equity these funds rarely invest in young, high growth companies.
Some equity income funds invest in stocks with dividend yields. While some funds invest in stocks with specific characteristics (For e.g.: preferred stock). Also, some of them invest with a particular type of issuers or a specific type of credit rating.
They provide better returns in comparison to bond or money market instruments. Also, with fluctuating interest rates, dividend-paying funds continue to be a popular source of income for some investors.
Are income funds safe?
Income funds are relatively safer investment within equity as an asset class. These funds focus on generating regular earnings for their investors by investing in dividend-yielding securities. These securities can be company stocks and government securities. They can also be a certificate of deposits, corporate bonds, money market instruments or debentures.
These funds deliver returns in both falling and rising interest rate scenarios by active portfolio management. Historically, they have been found to offer better returns than bank fixed deposits. Unlike the lock-in period in a Bank Fixed Deposit, these funds are more flexible. These funds also offer flexibility for redemption and withdrawal.
These funds are suitable for investors who are looking for stable and regular income. For instance, a retired investor may consider investing in an this fund as they need money for their daily expenditure.
What is the difference between income and growth funds?
Growth funds aim to generate capital appreciation through high levels of growth and capital reinvestment. On the other hand, income funds aim to generate steady and regular earnings to investors. They invest in securities that offer regular dividend payouts to their investors. Also, these funds are less risky in comparison to other funds. Hence, they are an option for investors with low-risk tolerance levels who are looking for earning a regular income.
Growth funds invest in stocks that aim for achieving higher growth. Hence, the profits of these companies will be reinvested for expansion and further growth of the company. Growth funds are riskier as they are more sensitive to market conditions. However, over a long term investing in growth funds can benefit investors.
Can I get monthly income from mutual funds?
Yes, investors can opt for monthly income which is in the form of regular dividend payout funds. The dividend is a regular source of income for many investors. The income can be generated from several resources like dividend-paying stocks or individual bonds. These funds provide desired monthly income and liquidity through the professional management of fund managers.
There is a Monthly Income Plan (MIP) in mutual funds where investors can receive regular periodic (monthly, quarterly, half-yearly) dividend payouts. The returns in MIP can be volatile as these funds also invest in equity stocks. Sometimes, the dividend payouts may be irregular – in quantum or frequency.
Investors who are wary about fluctuating income can also opt for Systematic Withdrawal Plan (SWP). SWP allows a regular redemption of predetermined amounts. Also, investors can opt for SWP from any mutual fund investment. In SWP even when the scheme is making losses, it will pay out the amount opted by the investor by digging into the principal amount. However, in MIP the investor’s principal amount remains untouched. Also, only the capital appreciation portion is distributed to investors.