A Beginner's Guide to Income Funds

Income funds are designed to provide a good source of income for investors. They represent an alternative to the traditional mutual fund and several different benefits. Here are the basics of income funds and how they could benefit you as an investor.

What Are Income Funds?

The majority of mutual funds in the market put an emphasis on growth and appreciation of the value of the fund overall. Many investors seek to grow their portfolios over the long-term and traditional mutual funds provide this. In order to realize a return on your investment, you have to sell your shares in the fund at some point.

With an income fund, the point is to create a regular source of income for the shareholders of the fund. You do not have to sell your shares in the fund to bring in money. You receive a regular paycheck from the fund itself. These disbursements could be sent out on a monthly or quarterly basis, depending on which type of fund you invest in. This is a very popular fund among retirees that wish to limit their risk and provide a regular source of income over their final years.

How It Works

An income fund produces income for its investors using a variety of different investments. Instead of looking for investments that exhibit characteristics of growth, they look for more long-term fixed investments. For example, bonds are one of the most common investments that make up income funds. A bond, is a debt instrument that pays a regular rate of interest to the bond holder. Therefore, if you own a bond, you can look forward to a fixed income for many years. An income fund can purchase thousands of bonds over different sectors and provide a much larger source of income for its shareholders. Instead of relying on one particular bond in one industry, you can diversify your holdings over multiple corporations and industries.

While bonds are one of the most common investment tools that are utilized by income funds, they are not the only tool available. These funds also purchase stocks of companies that are considered low risk, and have a good history of paying dividends. The fund then returns those dividends to shareholders as part of their regular income payment. Income funds may even choose to buy portions of corporate loans to companies that are considered a good credit risk. There are a variety ways to comprise income fund, but every investment is designed to create some sort of a residual income for the shareholders.

Investment Considerations

This type of fund could be a worthwhile investment to those that want to limit their risk and create a regular source of income. It is ideal for retirees that do not want to experience the ups and downs of the market. On the other hand, you also be losing the opportunity to gain a higher rate of return with more traditional investments. Therefore, you should weigh the benefits and the risks of this investment before getting involved.

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