Investors will generally look out for two types of investment; fixed interest funds or equity income funds. In the case of fixed interest funds, the funds invest in either government debt, known as gilts in the UK, or corporate bonds issued by companies to raise money on which they then pay a rate of interest. With Equity income funds, a fund manager will identify firms that have a reliable track record of paying dividends. They tend to be more mature businesses usually in the mid cap or large cap sector.
The market globally has seen some interesting developments. For example, many emerging market nations are offering inflation linked government bonds, while the number of companies globally that pay reliable dividends has been increasing. These developments have extended the investment universe significantly. Of course, many fund managers see many opportunities in the UK in both corporate bonds and in income-producing shares, though recent problems at BP, which briefly suspended its dividend, may suggest investors need to consider how diversified their portfolio is.
However, neither strategy is without risks. For example, the economic crisis means that government bonds are much riskier particularly in Europe, while returns on all bonds are vulnerable to inflation. Investment on equity is usually even higher on the risk scale.
If you have decided to focus on investing for income, you may consider investing in a new fund, perhaps with this year’s ISA allowance. Otherwise, if you have a larger portfolio, you might tilt your asset allocation. You may wish to move some interest-paying cash savings. Cash deposits are safest with the least risk to both the capital sum and any desired income level, but that usually means returns are low and can be eroded by inflation.
If you are considering changing your investments to increase your income, please contact us on 028 90 668700 so we can match your attitude to risk to the appropriate investments.
Chartered Financial Planner