Unsure of what to do with your savings and looking for a less risky option to invest in? A diversified income fund might be the right choice. With the right diversification, you’ll earn regular income on the fund and enjoy lower risk for it. If you opt for real asset income funds, you might be able to hedge against inflation and down markets. But how will you know if a diversified income fund is the right choice for you?
We have the answers. Let’s dive in on how diversification provides less risk, and great potential for income.
Table of Contents
What Is A Diversified Income Fund?
An income fund is an investment vehicle designed to provide income at regular intervals. They provide this income by investing in companies that offer dividends on their stock. They’re known to be lower risk and offer lower returns than their growth fund counterparts but make up for this in the return they offer.
Income funds are offered as private, mutual, or exchange-traded funds and are structured to avoid capital gains and appreciation.
Income funds are ideal for passive income. If you have the capital saved, you stand to make a percentage on it each month and the payments are provided at regular, predetermined intervals.
Diversified income funds are income funds with a portfolio that has an asset mix that’s spread across multiple types of securities. These may include bonds, common stock, real estate securities, foreign market bonds, and money market instruments. Diversified income funds are actively managed and the asset mix is adjusted at the discretion of the fund manager.
Diversified income funds are ideal for risk mitigation and providing reliable income. As a general rule, the more diversified a fund is, the safer it is when the market shifts, but there are no guarantees.
As with any other investments, you’ll find a wide range of diversified income funds with different philosophies and investment styles.
What About Diversified Real Asset Income Funds?
These income funds are diversified to focus on real assets. Real assets are physical assets that derive worth from their substance and properties. A tangible good can be considered an asset, but real assets commonly include precious metals, commodities, real estate, equipment, land, and natural resources.
Diversified Real Asset Income Funds are a great fit for most portfolios as they have a low correlation to financial assets. When stock or bonds aren’t doing so well, chances are that your real assets are doing fine.
It’s important to consider that the inclusion of gold in these portfolios can serve as a great hedge against bear financial markets or markets on the downturn. Gold is considered a safe haven and investors have a tendency to flock to it in down markets in order to save capital.
If inflation is forecasted, or on the rise, real assets have a tendency to perform better than financial assets, value is more stable and income tends to be more reliable. Especially where real estate is involved.
Overall, diversification is a safe bet against market volatility and provides a hedge against poor markets and inflation. Real assets tend to provide steadier returns but might not have the same growth or income opportunities as financial or intangible assets.
Tax Benefits Of Diversified Income Funds
Income funds provide low risk, with a lower return to match, but make up for it in regular income. Most funds structure this income in a way that prevents capital gains tax liability. By avoiding lump-sum exposure, investors realize more of their income and aren’t on the hook for larger tax bills.
There is a catch, in that income from dividends is still considered ordinary income and may be taxed at a higher rate than your salary. It’s also important to consider that funds with assets less than a year old are taxed at higher rates as well, and that may be passed on to you as the investor.
One way to avoid taxation at large is to opt for a fund that invests in government-backed securities only. In most cases, your income will be lower, but you won’t be on the hook for taxes at all. This applies to both government and municipal bonds but not all municipal bonds are created equal. Be sure to do your research and compare funds to see what they invest in and how taxation is structured.
If your income fund happens to be a mutual fund, taxation may be treated differently as your returns are typically a combination of dividend income, interest income, and appreciation of capital. Consult the fund prospectus or with your financial services professional for more on how taxation within your fund works.
Should I Invest In A Diversified Income Fund?
The answer depends on what your goals are and where you’re at in your financial journey! Investment strategy is unique to each individual and income funds have a place in every portfolio. Whether you’re considering investing in real asset income funds or diversified income funds, it’s worth noting that both might work too. Diversified Income funds are ideal for those who already have capital and would like to earn passive income but run typical risks associated with financial assets. Real assets tend to be more consistent but may not provide as high of an income as financial asset portfolios. If real assets sound like a great idea, Commercial real estate investing is another great option for those who looking to diversify their portfolios.
The best practice is to consult your financial professional, think about your goals, and plan for your financial future. Keep in mind that not every fund is a good fit and there are risks trading income funds and growth funds alike.
When you’re ready to deep dive into the world of income funds, growth funds, and investing, 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.