Investors who prefer to earn a passive income from their accumulated capital have a wide range of options available. One class of passive income investments, generally known as income funds, provide investors with a steady stream of payments in regular intervals, enabling them to better predict their cash flow heading into retirement. Typically, income funds also have a quick return of capital, offering the investor an excellent opportunity for liquidity along with stabilized income.
Income funds come in a variety of forms, from ultra-high security, low yield government paper to still very safe but more profitable real estate funds. Let’s begin with some background on what income funds are, how they work, and which one might provide your ideal balance of risk and returns.
Income funds are a type of private fund, mutual fund, or exchange-traded fund (ETF) that are designed to produce passive income on a monthly or quarterly basis, rather than paying lump-sum capital gains or appreciation on paper. Often other fund models have a large return paid at the close of the fund, typically 5, 7, or even 10 years out. For investors who would like returns consistently, and who want to avoid the long repayment terms, income funds offer a unique option.
Income funds can hold a sweeping array of investment instruments, from government and municipal bonds to corporate debt obligations and preferred stock. There are also money market funds, along with dividend-paying stocks to choose from.
The share prices of income funds aren’t fixed but instead will generally fall when interest rates rise and increase when rates fall.
Typically, any bonds that are included in these funds are investment-grade and/or very safe, and if there are other types of securities in the portfolio, they’ll be of sufficient credit quality to mitigate risk.
There are two common high-risk funds that focus primarily on delivering passive income to investors—high-yield corporate junk bond funds and bank loan funds that invest in adjustable-rate loans written by banks and other financial entities.
Money market income funds invest in certificates of deposit (CDs), commercial paper, and short-term Treasury bills, which are all low-risk investments.
The primary objective of these funds is safety and security, and they generally have a low share price, which means they tend to deliver relatively low yields.
As the name implies, bond funds invest in corporate and government bonds of ranging quality.
The least risky bonds funds hold government bonds, which have virtually zero default risk. These are typically used as a safe haven for investors in times of uncertainty. Consequently, their yields are lower than comparable corporate bond funds.
The main difference with corporate bonds is that they carry more risk that the issuer might default on their interest or principal payments. Because of the higher risk, investors are rewarded with slightly higher yields. Rates are largely dependent on their grading, from investment-grade bond funds to below-investment-grade (junk) bond funds.
Some publicly traded companies pay dividends on their stocks, and the funds that invest in these types of stocks are known as equity income funds. Equity income funds are highly popular with retirement-age investors seeking steady passive income streams to maintain a high quality of life.
One of the most advantageous types of passive income funds is a real estate income fund. These funds not only have high degrees of security for the yields provided, but they can also have some tax benefits as well. Let’s examine some of the types of real estate involved in these funds.
Real estate funds that focus their portfolios on commercial real estate usually hold many different types of commercial properties to balance risk. Here are the main types you’ll see in these funds.
One of the top-performing commercial real estate segments currently is industrial and warehouse space.
A rapid increase in e-commerce order volume has emerged as a powerful driver of the performance of these property investments. There is an expected 250 million square foot shortage in supply forecasted in 2021, driving tremendous growth in this market segment.
Retail commercial property has the potential to provide consistent, high-quality returns for commercial real estate fund portfolios.
The key is finding tenants in high-growth, stable industries such as healthcare, grocery, and specialty stores that focus on delivery. These properties can provide secure passive income consistently through various market cycles.
Multi-unit apartment complexes and multifamily properties deliver consistent returns, with more stability forecasted as more people go back to work after the pandemic.
These are generally secure sources of long-term passive income when assets are thoroughly vetted prior to purchase, along with being in a market that has a net positive migration rate.
Some real estate funds focus on residential properties, such as single-family rental homes. Typically, these carry higher risk due to the lower number of tenants per property. This requires more scrutiny in the tenant screening process to keep risks to a minimum.
Funds with a strategy of buying unimproved land develop into modern real estate concepts are known as real estate development funds. As you might imagine, these types of funds are complex to analyze because of the numerous permitting requirements and construction factors involved. One committee decision may end a project, erasing the possibility of profits.
Generally, development funds are best for expert-level real estate investors who have a strong knowledge of or maybe even professional background in development construction and dealing with municipality regulations. Development investment funds are one of the highest risk funds in income fund investing.
Investing in income funds can be an excellent method to diversify your portfolio while generating consistent cash flow. With so many different types of income funds available, it can be difficult to determine which one is the best match for your investment objectives. For this reason, it is essential to grasp the key metrics and performance indicators used to evaluate income funds.
The return of an income fund is a crucial measure in any analysis of that fund's performance. Income earned by the fund from its holdings (dividends, interest, leasing, etc.) expressed as a proportion. Consider the fund's average return over different time periods, as well as any related fees and expenditures, when making a decision. Finally, think about the fund's risk profile and how well it fits into your general financial plan.
Ultimately, the key to effectively evaluating income funds is to conduct research and consider all pertinent metrics and performance indicators. By taking the time to evaluate income funds thoroughly, you can make more informed investment decisions and construct a diversified portfolio that meets your particular financial objectives.
When you aim to diversify your portfolio but want to keep your risks low, all while earning predictable passive income, Saint Investment has a real estate fund that has the best of both worlds.
With Saint, you’ll have a team of real estate experts analyzing every asset. Besides leveraging our real estate investment expertise, our real estate funds feature detailed reporting and operational transparency, enabling you to earn real estate income with peace of mind.
Call (323) 483-0291 today to learn more!
Mutual funds that engage mainly in income-producing assets like bonds, dividend-paying stocks, and real estate investment trusts are known as income funds. Providing a steady flow of money to clients is the primary objective of income funds.
Investing in an income fund is a wise business decision for those seeking ways to generate consistent income from their financial assets. This type of investment company offers a diverse range of services, allowing investors to choose from various types of fixed-income securities, bond funds, and dividend-paying stocks. By providing a steady stream of income, income funds help reduce fluctuations in investment returns, making them an attractive way to protect your portfolio from market volatility. With the right information and careful consideration, an income fund can be a reliable way to grow your wealth over time.
Depending on the specific assets held by the fund, income funds may be exposed to risks like interest rate risk, credit risk, and market risk. In addition, the level of income generated by the fund may vacillate based on market conditions or the performance of the fund's fundamental assets.
If you're interested in making income funds a part of your investment strategy, there are several ways to get started. One way is to open a trading account on a reputable investment site, where you can research and compare different income fund products available. Alternatively, you may want to seek advice from a financial adviser who can provide guidance on selecting the right income fund for your purposes. Whatever way you choose, it's essential to thoroughly understand the fund's goals, risks, and expenses before investing. To help you better understand income funds, consider looking at examples of past fund performance, including earnings data and other relevant metrics. With careful consideration and the right information, income funds can be a valuable addition to your investment portfolio.
The efficacy of an income fund can be measured using variables such as the amount of income generated, the fund's total return, and how it compares to benchmarks in the same asset class. It is essential to routinely assess the performance of the fund and make necessary adjustments.