Although a lot has been written about income-oriented funds not having much of a future ahead of them, some income-based mutual funds continue to outperform even some of the lower risk equity funds (and the S&P 500 easily).
In other words, just because a few people write about the dangers facing income investments like bonds and other high yield investments, it does not necessarily mean that there is no point in owning them.
In reality, a lot of people have no choice but to own income funds, even with the prospect of higher rates threatening the recent, strong performance that a lot of these funds in enjoyed.
But not all of them are bad.
Many income funds will continue to perform well for a lot of investors, but the trick will be to find the right one for your portfolio.
Some of the considerations that all investors need to keep at the top of their investment priority list will be the next three things: 1.
Good yield.
With an above-average yield, investors who own income funds will continue to earn considerable income, even as the market value of their income investments drop.
In most cases, this will mean investing in higher yielding corporate issues that come with a bit of risk.
That is because corporate issues will not drop as much; while rates increase overall, the risk premium that has previously been priced into a lot of these types of investments will diminish.
This means rates will rise less for high yield corporate bonds than they will for government issues which can and will rise considerably.
Hence, the greater price risks are believed to be in government bonds, not corporate bonds.
2.
Good track record.
Most investors will either lack the resources and/or funds to create their own bond portfolios.
As such, they will likely invest in mutual funds that consist entirely of bonds.
This makes the investment process quite a bit easier for a lot of investors because finding historical, risk-adjusted performance records is simple.
Finding an income fund with a strong track record with solid returns will make for a safer income-based investment.
3.
Positive inflows and/or high capitalization.
Funds with a steady stream of inflows or those with a large capital base will mean for greater liquidity.
This is instrumental with any type of investment.
The reason it is important for income funds is that it allows investors to draw on them...
period.
The risk of having the fund closed is reduced considerably when the fund is properly funded.
While there is certainly some risk to investing in income funds, the income asset class is a mandatory requirement for all investment portfolios.
Choosing the right one will make a big difference in investor satisfaction and success.