One of the ways that you can build up your investment portfolio is to look into income funds. Income funds provide you an opportunity to build a revenue stream, as well as add a little instant diversity to your portfolio.
What Are Income Funds?
Income funds are fairly straightforward. They represent a collection of investments that provide income. These can include dividend paying stocks, bonds and other investments that provide income. Many people find income funds attractive because it provides them with a source of income, while at the same time providing some sort of diversity. Many income funds look to dividend aristocrats and “safer” bonds like Treasuries when choosing what to include in an income fund.
It is important to note that most income funds are not going to show a lot of growth. They are not constructed to provide you with high earnings, but are instead meant to provide steady income. If you are looking for get rich quick investments, income funds usually aren’t the way to go. Instead, these funds are created to provide as stable a cash flow as possible.
Using Income Funds to Your Advantage
There are two main ways that you can use income funds to your advantage:
- Create a source of income: The first, obviously, is to create a source of income for you. You can build up your investments in income funds over time, so that you eventually have enough shares to warrant larger payouts. Many people nearing retirement put a chunk of their nest egg into income funds in order to receive a regular payout – even as the value of the investment theoretically increases.
- Reinvest dividends to build wealth: Another option is to reinvest your earnings in order to build wealth. Many income funds are set up so that proceeds you receive are automatically used to buy more shares. This means that you are basically getting free shares. This can increase what you own at a much quicker pace. This way, when you decide to start receiving payouts rather than reinvesting, you own more shares and receive more. Additionally, this can be a way to build the number of shares you have so that you get more if you decide to sell your investment later.
If you follow the reinvestment route, you can improve your retirement nest egg by keeping your fund in a qualified retirement account. You can receive a tax advantage by combining your income fund with your retirement account. It’s a great way to build your nest egg while reducing the amount of wealth eroded by taxes.