Income Funds

Income funds are an effective way to earn interest on capital that may not receive a very high rate of return. With today's interest rates at a low level investors, especially retirees, are looking for alternatives to savings accounts. Income accounts that invest in dividend paying stocks that pay out regular dividends to their stockholders. These funds do involve some risk but investors that are looking to realize a higher level of return believe that the trade-off is worth it. Income funds fit into an entire portfolio as a complement to other funds that provide guaranteed income. Income accounts can either pay-out their dividends or reinvest them in an accumulation program. It is important to know how much income will be needed to be withdrawn from the account and how often. Keep in mind that the underlying equities can fluctuate based on the company's performance and the overall market.

 

Frequently Asked Questions ( 8 )   Add a Question

  1. Can the amount of the dividend change over time?
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    The dividend payment is based on the current dividend paid by the underlying company (can be quarterly or monthly, for example). If the firm alters the dividend of the underlying stock the payment to shareholders will also change.

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  2. How do the funds decide on how much the dividend payment will be?
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    The amount of the dividends is determined by the stock issuers. The funds invest in stocks that pay dividends and then pass those payments on to the fund owners, either via a reinvestment or a payout, dependent on the client's wishes.

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  3. Are Income Funds more risky than other types of funds?
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    The only aspect that differentiates income funds from other funds is that they invest in stocks that pay a dividend. As the portfolio manager has likely chosen stocks across industries and type the risk will be off-set by the diversification.

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  4. Is it possible to lose the money invested in an income fund?
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    Investment advisors direct their clients to only put money into income accounts that they can afford to lose. Income accounts should not be the primary account in any retiree's portfolio. It is always a good idea to consult with a financial professional prior to making any investment decisions.

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  5. Does it make sense for younger people to invest in Income Funds.
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    Anyone that is looking for a Growth fund or who wants to receive payments quarterly, is a good candidate for an Income Fund. These funds are popular with retirees as they add supplemental income to those who may be on a fixed income.

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  6. Is it possible to switch between payout and reinvestment of the dividend payments?
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    All funds are different but it is reasonable to assume that there is some paperwork associated with altering payoff choices that may take some time to go into effect. It is not widely offered as an option to flip between payment and reinvestment.

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  7. Are the fees higher for Income Funds than other types of funds?
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    Income funds are similar to all types of mutual funds in that they are comprised of a bundle of underlying stocks. The dividends are paid by the stock issuers, not the funds, and while there may be some additional adminsitrative tasks ther should not be a significant increase in fees.

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  8. Are Income Funds a good investment for retirees?
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    Income funds are very popular with retirees as they pay out income and to people on a fixed income, this can be a huge plus. For those that do not presently need the income, it can be reinvested rather than paid out depending on individual circumstances.

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