With the recent volatility in the equity markets, some investors have likened investing funds to walking a tightrope between choppy equity funds and the ongoing lethargy of bond and income funds. You might even think of it as a “Goldilocks” environment: equity funds are too hot for many investors’ taste, while fixed-income funds are too cold.
So what’s the mutual fund solution that’s just right? One area to consider is income funds that also offer some growth potential.
A different kind of income fund
Some income funds are specifically structured to offer a combination of reasonable growth potential along with income. Here are three.
1. Income allocation funds. These funds invest in a variety of fixed-income securities with modest exposure (usually) to dividend-paying equities. They may also invest in similar foreign securities. In addition, some of these funds are structured to pay out tax-preferred income making them suitable for your non-registered portfolio.
2. Monthly income funds. These are sometimes called “high-income funds,” and they may augment their fixed-income holdings with dividend-paying stocks and other equities. In some cases, the asset mix may be closer to that of a balanced fund than an income fund. For this reason, it’s especially important with these funds to get the balance right not only in picking the right fund, but also within the context of the rest your portfolio.
3. Global bond funds. These funds have a mandate to invest in a spectrum of foreign fixed-income securities. Their exposure to a variety of economies and currencies enables you to tap into growth opportunities outside of Canada. In addition to international diversification, they may also offer a hedge against rising interest rates in our own domestic economy.
Possible price fluctuations
Because these income funds offer some growth potential, they may experience more volatility over the short term than traditional straight-up income funds. Remember: In the investment world, higher potential returns are always accompanied by greater risk.
This is partly due to the securities they hold. These funds may hold bonds issued by companies that are more likely to default on payments than blue-chip corporations.
Effective risk-management strategies
To help reduce the impact of short-term volatily on your portfolio, you may want to consider averaging into the funds. Rather than buying with a single lump sum, we can spread your initial investment over a period of months to take advantage of dollar-cost averaging. As the price fluctuates, you’ll purchase more fund units when the price is lower and fewer when it is higher. This approach can result in a lower average cost per unit.
And, of course, you can count on us to closely scrutinize any fund you’re considering. Together, we can review the fund’s objectives and its individual securities to make sure they’ll work effectively with the rest of your portfolio.
Larry Kleinmintz, R.H.U., T.O.T., M.D.R.T.
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