For investors who want to earn regular income from their investments, but don’t want to first build a portfolio of stocks or invest directly in bonds, there is an alternative solution. Income funds that distribute dividends offer investors a regular income alongside the ease and accessibility of mutual fund investing.
Here are five advantages of investing in funds for income.
1. Investors Can Start With a Small Sum
The first major advantage of investing a regular sum into an income fund is that it does not require a large lump sum to get started. It’s easy set up a plan to pay a set amount into the fund each month and that money can build up over time into a larger pot.
By taking this approach, investors stand to benefit from euro/cost averaging, or as pound/cost averaging, which reduces the average cost per share over time. Investors buy more shares when prices are low, and fewer when prices are high, so this averages out the price paid per unit. This is against buying a fund at on a fixed date using a lump sum, which can tempt investors trying to time the market.
2. Income Seekers Can Achieve Better Diversification
While a portfolio of individual stocks needs investment in stocks from different sectors in order to achieve proper diversification, that diversification is built in to a fund. The fund manager will pick and choose the investments in the fund on investors’ behalf. This enables access to funds that distribute dividends in a range of fund categories, from equities to fixed income and mixed funds. They are available in almost all fund categories, including equity and fixed income, and can also offer a range of yields. A range of yields is visible below across different Morningstar fund categories: for example, an investor may want access to US stocks is happy to accept a lower yield than in other categories such as UK equity income.
3. Investors Can Tap Into Fund Manager Expertise
That can be especially invaluable to novice investors, and those who do not have the time to build a portfolio of dividend-paying stocks. With a fund, the management team will select the best companies in each sector, comparing dividend yields, valuations, financial strength, for a fee. Otherwise, an individual buying a single stock for income may be tempted by a higher yield without looking closely at company fundamentals, which may have a big impact on a stock’s ability to continue paying dividends.
4. Choose When Dividend Income is Paid
Some companies pay dividends to shareholders annually, some every six months, and some quarterly, but this is out of investors’ control. However, individuals can choose a fund whose payment dates align with their needs, such as quarterly or monthly income.
5. Income Funds Can Lessen the Impact of Currencies
Investing in international stocks will be affected by currency fluctuations, either positively or negatively. An investor in the eurozone, for example, will have to bear the cost and impact of any movements in the dollar if they decide to invest in US stocks, for example.
By choosing a fund and opting for share class units denominated in the investor’s home currency, it’s possible least avoid the headache of working out the impact of currency movements on a portfolio.
