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Investors seeking passive income from their wealth have numerous options available to them when it comes to income funds, some of the most attractive of which are high-yield funds. But with that said, income funds are offered in numerous forms, each with different yields and risk levels. These can range from ultra-high security, low-yield government bond funds to still very safe but higher-yield real estate funds.
Passive income funds, often simply called income funds, deliver a consistent income stream for investors in the form of interest payments at regular intervals. The main benefit of income funds is that they make it easier to predict cash flow heading into retirement, helping maintain high standards of living. Another benefit of income funds is their ability to quickly return capital, providing the investor liquidity beyond stable incomes.
To gain a stronger understanding of what the difference is between low-yield and high-yield income funds, how they work, and which could deliver your ideal balance of risk and returns, read on.
Income funds can be either private funds, mutual funds, exchange-traded funds, or real estate funds that are structured to deliver consistent passive income payments, either monthly or quarterly, instead of paying the capital gains from appreciation in a lump-sum.
In contrast, other types of funds pay a large return at the closing of the fund, often 5, 7, or even 10 years after the initial investment. Investors that prefer more frequent returns on their capital sooner often find income funds to be the preferable option.
When it comes to the instruments income funds may be composed of, there’s a wide array of possibilities, from holding low-yield and low-risk government and municipal bonds to corporate debt obligations that come with far greater risks and returns. One option that provides a healthy balance between risk and return are real estate income funds.
When it comes to most low-yield income funds, the share prices aren’t fixed, but can actually rise and fall when interest rates fluctuate. Many of these funds include bonds that are institutional investment-grade and very safe, and if any other types of securities are included in the portfolio, they will normally have high-quality credit ratings to keep risk levels to a minimum.
A few types of high-yield funds commonly focus on delivering passive income with higher returns to investors—high-yield corporate junk bond funds, bank loan funds that invest in adjustable-rate loans, and real estate investment funds that hold high-performing investment properties.
High-yield bond funds focus their investing efforts on buying lower-quality bonds, which often come with far higher risks than those with lower yields. Although these funds may propose to offer higher yields than others, they are also much more susceptible to economic and credit downside risk.
Usually these funds invest in U.S. high-income debt securities where 65% or more of the bond assets are either not rated at all or they’re rated by the major agencies like Standard & Poor’s or Moody’s at a BB level (considered speculative) and lower.
For the most part, funds that invest in corporate bonds come with the added risk of the issuer defaulting on their interest or principal payments. Because of this, investors are paid slightly higher yields in return. Investing in these funds comes down to analyzing the risks in relation to the returns. Rates are tied to their grading in almost every case, ranging from investment-grade bond funds to below-investment-grade (junk) bond funds.
The most significant benefit of high-yield ETFs over high-yield mutual funds are lower fees, greater diversification, and intraday liquidity. There are far more high-yield ETFs on the market when compared with high-yield mutual funds. One main drawback of high-yield
ETFs is that they’re inherently passively managed, forcing them to match the performance of whatever the benchmark index is. Because of this, a high-yield ETF manager is forced to trade in a down market, even if the pricing is unfavorable.
A similar problem exists when it comes to high-yield index mutual funds. The managers of these funds don’t have the latitude to change strategies in poor market conditions. However, the diversity of selection within these funds often fit a wide range of investment goals.
If you choose to invest in high-yield ETFs or Mutual Funds, be sure to weigh their merits and drawbacks compared with your investing objectives—there are usually better alternatives.
When it comes to passive income funds with higher yields, commercial real estate income funds are hard to beat. Commercial real estate funds deliver both higher levels of financial security in relation to the yields provided, along with the possibility of tax benefits as well. So what types of real estate is owned by these types of funds?
Commercial real estate fund managers typically choose to hold numerous categories of commercial properties to better mitigate risk while still delivering strong returns. Here are the primary properties you’ll find in these funds.
High-yield funds that buy unimproved land to develop into numerous classes of real estate concepts are called real estate development funds. Typically, these funds are extremely complex to analyze for average investors because of the numerous permitting requirements and construction factors that could throw the numbers way off course. One zoning commission decision could instantly end a project, erasing any possibility of profits.
When your goal is diversifying your portfolio, but you’d prefer to minimize your risks of earning predictable passive income, Saint Investment has a commercial real estate fund that’s perfect for you.
Saint puts a team of commercial real estate experts on your side. Aside from leveraging our commercial real estate investment expertise, we provide you ultimate peace of mind through detailed reporting and operational transparency, enabling you to earn commercial real estate income you way.
Call (323) 483-0291 today to get started today!
A master in Investment, Marketing, and Capital Raising.
Nic has honed his focus on the Real Estate and debt markets with Saint Investment Group and pursues large-scale Distressed Asset purchases with his partners and syndications.