Income fund. Information on investing in income-producing mutual funds.One of the most common fears of potential new investors is the loss of capital
Posted by
awiopian at Wednesday, April 16, 2008
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One of the most common fears of potential new investors is the loss of capital - the initial amount of money put into an investment. Current market trends prove that this fear is well based. But, the fear should not turn people who want to save money completely away. An income fund investment is a great compromise for those who are still a bit skittish with their money. An income fund focuses on providing a steady income for the investor, while not focusing on increasing the actual capital invested..
Sound confusing? After all, how can someone make money if capital doesn't grow? Because an income fund is typically a combination of high yield bonds and government securities, that way, most money that is originally invested is protected (bond face values are insured by the government). The profits that can be made from an income fund come from regular payouts based on the interest percentages on the bonds held within the fund. Payment from an income fund is quarterly - March, June, September, December.
Income funds are usually recommended by financial experts as a good way to add variety to an investment portfolio with less risk than other mutual funds. There are risks involved when investing in an income fund. Securities pose the greatest risk, as their values can increase and decrease based on the type of funds within them (mortgage and other debt securities, in particular). Yet, the risk incurred from an income fund is far less than other mutual funds or stock investments. Risk management is probably the best benefit of income fund investment.
There is one caution, though that needs to be mentioned. Within an income fund, junk bonds can part of the investment acquisition. Since the income fund is a diverse mix of different bonds, these low grade (and mostly high yield) bonds are sometimes found in the fund. The presence of junk bonds within an income fund is not illegal, but can make the investment a higher risk than usual. Consult a financial planner or broker if there is concern over this possibility.
As with any investment that has inherent risk, an income fund is managed by a financial planner or broker. This is due to the fact that there is a great deal to monitor as far as the buying, selling and value analysis of the accounts in the portfolio. The income fund can be a perfect blend of getting a steady income from bonds, while engaging in a monitored amount of risk with the capital invested from the beginning.