Income Funds essentially seek regular return with reasonable safety. These invest predominantly in fixed-income securities or debt instruments and a portion in money market instruments. And open-end funds score over their closed-end counterparts in terms of superior liquidity.

The income fund advantage
High Liquidity: Open-end income funds offer continuous sale and repurchase. It is easier to pull your money out of a fund without adverse price consequences even in volatile markets.

Regular Income: Income funds generally declare dividend regularly- monthly, quarterly, semi-annually. Unlike some of the closed-end funds, these don't assure any returns. Butdividend on these funds compares favourably with the prevailing interest rates.

Easy Access: Unlike individual debt which are often difficult and expensive for smaller investors due to high transaction cost and effort in terms of shopping around for best prices, funds are rather easily accessible. Most of the income funds can be bought and sold at NAV and hence investors can get in and out of the fund at zero cost.

Ease of Reinvestment: Income funds offer convenient reinvestment of dividends and capital-gains distributions, even for small amounts. This allows for more efficient compounding, which can lead to higher returns over a period of time.

Professional Management: Fluctuating interest rates and other factors make a buy-and-hold bond strategy perilous. Better returns often result from an actively managed portfolio. Good fund managers can react to opportunities in the fixed-income market and enhance performance. They can also unload lower-quality issues when their risks increaseto unacceptable levels.

Diversification: Since a mutual fund holds dozens of bonds, it exposes fund holders to far less credit and interest rate risk than would be assumed by taking positions in one or a few bond issues. This aspect can be especially important to investors of limited means. An income fund is also a tax-saving vehicle. All income funds offer two plans - dividend and growth. For investors, who opt for the growth plan and hold the units for a year, the gain is treated as long-term capital gain and, after indexation, the effective tax rate is lower than 20 per cent. Further, investors can also claim capital gains tax exemption under section 54EA and 54EB by investing in respective plans.

Income funds also facilitate ultimate convenience by way of a systematic withdrawal plan and an investor can plan and change his drawings depending on his precise needs while in case of individual, bond redemption is fixed at the time of issue. One word of caution for income fund investors: The fundyielding the highest return is never the safest. For every ounce of return, there is a unit of risk associated with it. So while investing, one must look for the right balance of credit quality of the portfolio and the yield. And once you invest, keep tracking!