Income funds

Income funds are mutual funds that aim to pay regular income by holding debt securities. In Pakistan they sit between a money market fund and a pure equity fund on the risk scale. This page explains what they hold, how rate changes move their price, and what to check before you compare profit rates.

What income funds hold

Income funds invest mainly in debt securities such as government securities, treasury bills, commercial paper and bank deposits. Some hold a mix of fixed-rate and floating-rate instruments. The fund manager decides the mix based on the fund's stated objective and the market view.

Aggressive income funds tend to hold longer-dated or lower-rated debt to seek higher income. Fixed rate funds focus on instruments whose coupon stays the same until maturity. Both types sit in the same category page, but their holdings and behaviour differ.

Because the holdings are debt, the fund earns from coupons and from the return of principal at maturity. The value of the fund's units moves as the market value of those holdings changes. That market value depends on rates and on the credit quality of the issuers.

Rate changes, risk and liquidity

When interest rates rise, the price of existing fixed-rate debt falls, so the unit price of a fund holding such debt can fall. When rates fall, those prices can rise. Funds holding shorter-dated or floating-rate debt feel this effect less. This is why the fund's profit rate in a past period does not tell you what it will pay next.

Credit risk matters too. A fund holding debt from an issuer that struggles to pay can lose value. Liquidity risk matters when the fund must sell holdings quickly, especially in a thin market. Read the fund's disclosed holdings and its risk section rather than only its recent return.

On liquidity, income funds usually allow redemption on the stated dealing days, but settlement can take time. Some funds apply a notice period or a charge for early exit. Check the fund's documents for the exact terms before you rely on the money being available at short notice.