Income funds have been around for quite a while and subjectively became part of an investor’s tool kit. Several investors rope in income funds with a goal of capital preservation and steady capital growth. Arguably, the inclusion of an income fund brings diversification, which is instrumental in the overall growth of the investment. This article seeks to lay out the underlying reasons why an income fund is necessary for your investment objective.
First and foremost, an income fund is universally defined as a conservatively managed unit trust or exchange-traded fund (ETF) that places emphasis upon current income as opposed to capital gains. In general, income funds have a huge holding in fixed income instruments, preferred stocks as well as money market instruments and a moderate holding in dividend-paying stocks. However, the structure of each fund varies based on the underlying investment objective of the fund manager.
There are several varieties of income funds. A handful variety of income funds come to mind which entails the following: equity-based, high-yield bond, money markets funds, bond funds and a hybrid or mixture. A brief description of each income fund is as follows:
An equity-income fund chiefly invests in stocks that pay regular dividends, thus allowing capital preservation. High-yield bond income funds invest predominately in corporate bonds and floating rates loans issued by banks or other financial institutions.
Money market funds commonly invest in certificates of deposit, commercial paper and short-term Treasury Bills thus rendering a high degree of safety.
Bond funds largely invest in corporate and government bonds.
Lastly, hybrid income funds invest in bonds, dividend-paying stocks, money market instruments and real estate investment trusts (REITs) with varying allocations.
Reason why an income fund is a must keep in any portfolio holding:
Generally, all income funds are conservatively managed with a sizeable allocation in low-risk instruments thus cushioning the investment from market volatilities. A case in point was the drastic effects of coronavirus on the markets in the first quarter of 2020, where most asset classes recorded significant losses. In this market turmoil, most income funds-maintained buoyance, which thus supports the reason as to why they should be included in an investor’s portfolio.
Furthermore, income funds allow capital preservation and steady capital growth which is a cornerstone for a medium to long term investment strategy. Capital preservation and growth are one of the anchoring pillars of every investor’s strategy, thus the inclusion of an income fund establishes fundamentals of a prosperous investment strategy.
With a steady yield, income funds can become handy for annuitants, who in a certain time frame would want to withdraw regular income while simultaneously maintaining growth of the investment.
We grew up with this phrase, “Do not put all your eggs in one basket”. In that same vein, income funds offer diversification, where the risk concentration is evenly dispersed across several asset classes. This, depending on an investor’s investment horizon, liquidity needs, and objectives, is crucial for investment growth.
It is assumed every investor has the same investment expectations of conserving and growing capital, therefore in order to handsomely see the growth of investment, inclusion of an income fund might be a worthwhile idea. Placing an income fund into your investment should thus be anchored upon your investment objectives and constraints, time horizon, liquidity needs, unique needs and tax considerations.