What is an income fund?
An income fund aims to generate income by investing in a range of dividend-paying stocks, aiming to increase earnings and the value of the original investment over the long term. Funds in the Investment Association’s UK Equity Income sector, for example, invest at least 80% in UK companies and aim to generate income greater than that of the FTSE All Share’s yield over three years.
The FTSE All Share gives investors access to one of the world’s major economies, with plenty of UK companies paying substantial and growing dividends to their shareholders.
Stocks that pay out high dividends are often associated with a style of investing known as ‘value’.
Key benefits of an equity income fund
- As with other mutual funds, equity income funds offer diversification. This can provide protection to investors from the risks associated with holding individual stocks, however no investment is risk free. You may get back less than you originally invested.
- On the whole, equity income funds can also offer a higher potential return than other income investments such as bonds or cash. Because of this they are valuable tools for long-term investors who are able to endure a certain degree of equity market risk.
- Although bonds can be used to generate income through interest payments, or ‘coupons’, using equities has the advantage that the income from dividends should have a high degree of protection against inflation. This is because companies can often raise their prices in an inflationary environment. Equities also offer the potential for capital growth via rises in the prices of the underlying companies held.
- If you feel you do not have the time, knowledge or inclination to manage your own portfolio of investments, you can delegate this to a professional manager by investing in a UK equity income fund. By investing just a few hundred pounds, you can usually obtain exposure to far more assets and industry sectors than you can by investing directly in the market yourself.
- The UK is renowned as a trusted commercial environment. It was ranked eighth in the World Bank’s Ease of Doing Business Index in 2019 and its rule of law, regulatory system and property rights make it a highly attractive market in which to operate, trade and invest.
- Although the UK became an ‘unloved’ investment market after it left the European Union, the fact remains that it has a robust economy and offers outstanding income-generating opportunities for investors who are happy to invest for the long term.
It is worth noting, however, that equities tend to be more volatile than bonds, so investors in equity income funds should invest for the long term of five years or more. The longer that investors stay invested, the greater the chances that their income and capital will grow.
Selecting the best manager is a challenge
The funds offered by Liontrust are actively managed, meaning that you have a professional determining which assets to invest in at any given time.
Selecting the best managed funds can be a challenge. If in doubt, you can seek the professional advice of a qualified financial adviser.
Liontrust’s funds are managed according to investment processes that have the potential to deliver excellent long-term returns with effective risk controls. These processes are robust, scalable and repeatable and are documented, which has advantages for Liontrust, fund managers and, most importantly, our investors, who know exactly how each of our teams will manage their money. Our distinct culture and approach to running money creates an environment in which our fund managers and employees can flourish, helping our investors to reach their financial goals, supporting companies in generating sustainable growth and empowering and inspiring the wider community.
