Are you interested in making income on the money you have saved up? The income fund is your answer. The perfect option for those who have capital and might be looking for low-risk investment options, the income fund offers several advantages with few disadvantages. From tax deferral benefits to passive income, you can’t go wrong with an income fund if it’s suitable for your financial goals.
But how do income funds pay out? And where do you look for more information on how income funds manage their portfolios?
Not to worry, we have you covered.
Table of Contents
An Overview Of Income Funds
Income funds provide passive income from securities, interest income, and capital gains. They’re invested in companies that provide monthly or quarterly dividends and provide a lower return with lower risk to match. These funds are offered as private, mutual, or exchange-traded funds and are usually structured to avoid costly capital gains and appreciation.
Income funds may invest in any security but commonly set their asset mix up to include bonds, equities with dividend income, cash, and income trusts. Any mix of income from these assets may be used to fund your passive income.
An important consideration when looking at income funds is how their pricing moves with the market. Income fund share prices aren’t fixed, and they tend to fall when interest rates rise and increase when interest rates fall.
In most cases, any bonds included within income fund portfolios will have a superior investment-grade rating, most other securities included will have higher credit quality to provide robust preservation of capital. Income funds tend to be less risky, provide lower returns, but offer dividend payouts as an income option.
Income funds make for great passive income and the more capital you have, the more money you stand to make on your investment. They provide income at regular intervals and may be a great hedge when the market is volatile as they’re lower-risk options and are typically well diversified.
How Do Income Funds Pay Out?
Income funds may be structured to pay out in a variety of ways. The most common is what’s known as a return of capital (ROC) distribution. This distribution pays out a mix of dividends earned on the securities, interest income, and capital gains and the total amount will vary on a per-fund basis.
It’s important to look past face value metrics like current yield. Funds may be set up to pay any amount of ROC distributions and the current yield doesn’t speak to this number. It’s hard not to see a high yield and think the fund’s a winner, but the yield is only one part of a larger equation.
Understanding asset mix and distribution breakdown sounds technical, but it’s much more useful for determining the value of an income fund in the short term and beyond. Asset mix also speaks to risk profile. While income funds are generally considered less risky, there’s a range of options that provide varying levels of risk and income.
Asset mix and distribution also provide an accurate barometer for the sustainability of current distribution rates. Where interest rates decrease, it’s difficult for funds to continue paying the same distribution rates since interest rates are lower and capital gains may turn to losses. There are several strategies to maintain distribution rates in these cases, but few of them are ideal.
Bear in mind that fund managers are bound by the fund prospectus and this may lead to certain sacrifices to keep distribution rates up.
The risk profile of an income fund is determined by exposure to equities, fixed income, and cash. The more exposure to volatile securities, the more risk in a fund or investment. The flip side being the potential for higher income.
Investment Strategy And Income Funds
As with any investment you consider, the prospectus is a great first step to your research process. The fund investment strategy is included here and provides an overview of how the equity portion of the fund is managed.
Contrasting the fund’s investment objective to the current holdings is a great way to determine the quality of the fund. There are times when the market isn’t ideal, and funds may stray away from their objective to preserve capital or distribution, but in most cases, a good fund will follow its objectives. Making the appropriate investment decisions to keep on track.
Asset mix fits into investment strategy as well, and you’ll want to check for diversification of the fund. A fund that’s too heavily invested in one asset will leave itself open to market risk and may be riskier than what you’re looking for. Especially when weighing income fund options.
How Often Do Income Funds Pay?
Income funds are structured to provide payments at regular intervals. The interval of payout will depend on the fund’s specifics, but most funds pay out monthly, quarterly, and annual payments.
Check the prospectus to see how often the fund pays out and look for specifics on ROC distribution. This will help determine how regular the payments are and how the fund allocates assets for these payments.
Income fund distributions are not guaranteed. While most funds will pay out at regular intervals, and make their dividend payments on a reliable basis, it’s important to note that it’s all subject to what the markets doing.
When considering how often income funds pay out, it’s important to do your research and read into what each fund does from a strategic standpoint.
Should I Invest In An Income Fund?
There’s no straight answer here. Your goals should dictate your investment strategy and income funds have a place in any portfolio. Keep in mind that income funds are ideal for those who already have money saved and who’d like to earn regular, passive income on their capital. Commercial real estate investing is another great option for those who are looking to diversify their portfolios.
The best practice is to consult your financial services professional, think about your goals, and plan for your financial future based on your current situation. Keep in mind that not every fund is a good fit and there are risks with trading any investment.
When you’re ready explore how you can make your money work for you, get your professional guidance for your investment decisions from proven experts in financial services — Saint Investment Group. Contact our team for a free consultation and discover more ways to make your money for you today.
President of Saint Investment Group
Nic is a two decade seasoned expert in investing and capital raising, specializing in Real Estate and debt markets. With Saint Investment Group, he leads large-scale distressed asset purchases and innovative syndications for investors.