Definition
The term income fund refers to a portfolio of securities that are expected to provide investors with a reliable source of monthly or quarterly income. These funds may consist of bonds, money market funds, as well as equities that pay relatively high dividends.
Explanation
Also referred to as fixed income funds, income funds specialize in holding securities that will provide investors with a reliable source of quarterly or monthly income. This is accomplished by purchasing common or preferred stock with relatively high dividend yields, in addition to fixed income securities such as money market funds and debt obligations.
Lower risk funds will hold debt securities, such as bonds, that are of investment quality. This approach helps preserve capital when interest rates are falling. Higher risk funds may hold bonds that are not of investment quality, commonly known as junk bonds. While the yields on these debt obligations will be higher, the risk of default is higher too.
Investors choosing income funds will typically have relatively low risk tolerance scores, since their investment objective is the preservation of capital and a reliable source of income. While the value of these funds can be expected to underperform during a bull market, they can also be expected to outperform during a bear market, thereby exhibiting below average volatility.