DEFINITION of 'Income Risk '

The risk that the income stream paid by a fund will decrease in response to a drop in interest rates. This risk is most prevalent in money market and other short-term income fund strategies, rather than longer term strategies that lock in interest rates. This is an extension of the interest rate risk on an individual bond.

BREAKING DOWN 'Income Risk '

The following example demonstrates the income risk in a short-term, fixed-income fund. If interest rates are 5%, the money market fund will pay out 4.75%. However, if interest rates suddenly drop to 2%, the fund's payout will have to drop to around 1.75% because it will be reinvesting its funds at the new rate.

RELATED TERMS
  1. Idle Funds

    Money that is not invested and, therefore, earning no interest ...
  2. Income Fund

    A type of mutual fund that emphasizes current income, either ...
  3. Lock Period

    A number of days, often 30 or 60, during which the interest rate ...
  4. Reinvestment Rate

    The amount of interest that can be earned when money is taken ...
  5. Ultra-Short Bond Fund

    A type of bond fund that invests only in fixed-income instruments ...
  6. Growth And Income Fund

    A mutual fund or ETF that has a dual strategy of capital appreciation ...
Related Articles
  1. Financial Advisor

    Advising FAs: Explaining Mutual Funds to a Client

    More than 80 million people, or half of the households in America, invest in mutual funds. No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
  2. Investing

    Fidelity Income Replacement Funds Overview

    Learn about the Fidelity Income Replacement Funds, with a summary of the methodology behind the strategy and details about a few of the funds.
  3. Investing

    VTIBX, DFGBX, PIGLX, TPINX, ANAGX: Top 5 Global Bond Funds

    Learn about the top global bond funds for 2016. See how funds with longer maturities and duration have greater exposure to interest rate risk.
  4. Retirement

    Money Market vs. Short-Term Bonds: A Compare and Contrast Case Study

    Discover characteristics of money market and short-term bonds, including how the investments are alike and different, and the benefits and risks each offers.
  5. Financial Advisor

    Best Income Investing Strategies for Retirees

    The past few years have been tough for retirees seeking income from their investments. Here are some of the best strategies that can help.
  6. Investing

    A Guide For Picking Long Term Mutual Funds

    Learn about considerations for investors when buying shares in a mutual fund for a long-term investment, including fees, type of management and portfolio goals.
  7. Financial Advisor

    How to Protect IRAs from Higher Interest Rates

    Rising interest rates don’t have to translate into investment losses in an IRA. Here's how you can protect your investments.
  8. Insights

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
RELATED FAQS
  1. What does a climbing interest rate risk signify about the economy?

    Learn what a climbing interest rate risk signifies for the economy. Interest rate risk is heightened with inflationary pressures ... Read Answer >>
  2. What are the risks involved in keeping my money in a money market account?

    Setting aside funds in a money market account can be a safe investment strategy, but investors should be aware of the risks ... Read Answer >>
  3. How do interest rates impact risk aversion in the market?

    Learn why interest rates and risk aversion have an endogenous relationship in the market, and why interest rates play such ... Read Answer >>
  4. Why are mutual funds subject to market risk?

    Find out why mutual funds, like all investments, are subject to market risk, including how the different types of market ... Read Answer >>
Hot Definitions
  1. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  2. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
  3. Tax Refund

    A tax refund is a refund on taxes paid to an individual or household when the actual tax liability is less than the amount ...
  4. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  5. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
  6. Merchandising

    Merchandising is any act of promoting goods or services for retail sale, including marketing strategies, display design and ...
Trading Center