Investors seeking diversification and current income have a plethora of alternatives about income mutual funds at their disposal. These income funds can invest in debts or equities or a combination of both.

There are different kinds of income funds. Different income funds are appropriate for different categories of investors. Before you invest in a fund, you should do some research on the best income funds.

Professional management and diversification

Regardless of the kind of underlying security in which an income fund invests, most of these funds share certain mutual characteristics, most importantly, professional management and diversification.

Investment in securities

Fixed income funds invest primarily in securities that have fixed maturities and interest rates. These funds can be suitable for both aggressive and conservative investors. However, this depends on the kind of securities the fund invests in. Before choosing an income fund, you should do background research on the top 5 fixed income funds, to get a detailed idea of how these funds operate. The rates of interest significantly determine the total returns that are posted by the fixed income funds.

Bond funds for conservative investors

This is usually the most widely recognized kind of income funds. Bond funds are the most suitable for investors with a conservative approach. These income funds invest in corporate or municipal debt or the government and often bear varying intensities of risk. Government bond funds are known to be the most conservative. Certain government bond funds invest only in Treasury securities. Municipal bond funds are suitable for the high-income investors who seek tax-free income from municipality-generated revenue. On the other hand, corporate income funds are widely considered the riskiest of the three categories of bond funds because the underlying securities which these funds invest in have the highest default risks.

Specialty fixed income funds

There are broadly two categories of income funds that do not invest in bonds. One of these two kinds of income funds is prime rate funds. Prime rate funds are also known as a bank loan or floating rate funds. Prime rate funds primarily invest in senior secured loans, which banks granted to certain corporations. These funds significantly tend to vary in factors such as liquidity. Many of these income funds are accessible only on a quarterly or a monthly basis. Mortgage-backed funds are known to invest in entities such as tranches or pools. These income funds pass on the interest of the shareholders.

Higher yields; investments in utilities

Equity income funds are a perfect choice for income investors who seek higher yields with an increased risk. The holdings of equity income funds consist primarily of preferred or common stocks and also real estate. Perhaps the most common category of stock income fund significantly invests in entities such as utilities. These income funds pass on the monthly dividend income to the investors who seek the kind of higher yields which are usually found in bond funds. Certain other kinds of income funds also make investments in preferred stock offerings, which remain comparatively constant in cost. These investments also pay stable dividends at finely competitive rates. The yields are usually at least one to two percent higher than the government bonds.

Commercial investments

Although there are certain exceptions, most of the real estate funds primarily invest in commercial entities or properties. Most of these income funds can also be categorized as income and growth funds. The holdings of these funds usually provide income from sources such as capital appreciation as well as rental revenue. Certain funds directly invest in commercial properties, while many income funds own holdings through unit investment trusts such as real estate investment trusts, which invest significantly in commercial properties. Real estate funds are also known to be tax efficient. These income funds use special rules for deferring gains on commercial property sales within the ambits of their portfolios. However, as these income funds are sector funds, the returns tend to be comparatively more volatile because of the lack of diversification.

Growth element

Growth and income funds are mostly combinations of equity and debt holdings. The real estate or stock positions involved provide the growth element. The growth and income funds are suitable for investors who have the primary objectives of income and growth. Conservative investors may reinvest the income generated by these funds to get higher returns over time. Income investors may keep up with inflation by letting the equity in their portfolio to appreciate.