 Personal Finance PowerPoint Presentation, Income Fund. Prepare to get financially fit by practicing personal finance. Most of this information comes from Investopedia Income Fund, which you can find online. Take a look at the references, resources, continue your research from there. This is by James Chen, updated March 22, 2021 in private presentations. We've been looking at investment goals, strategies, tools, keeping in mind the two major categories of investments that typically being the fixed income, usually the bonds, and the equities, typically the common stock. Also thinking about tools we might be using, such as mutual funds, such as ETFs, possibly helping us to diversify with less of an upfront investment than if we invested in individual stocks, individual bonds. Now we're thinking about what is an income fund? An income fund is a type of mutual fund or exchange traded fund that emphasizes current income either on a monthly or quarterly basis, as opposed to capital gains or appreciation. So if we think about the type of investments that are being made, we're going to be thinking about a mutual fund. So we're pooling our money together under the mutual fund. We're restricting the fund manager to be able to diversify, but at least restricting them to where we want them to put their money, that being the income fund component of the mutual fund or ETF. If we think about the types of companies they're putting their money in and their business cycle, for example, remember that here in the business cycle, that would be kind of the growth area. Some companies go through this kind of growth area where we would expect them not to be paying out dividends as much there because they're trying to hold on to their money, put it back into the business, buy things like property, plants and equipment, which we're hoping will generate future earnings and therefore be reflected in the stock price. When you're talking about more established companies then that have already have their infrastructure in place to not buying a whole lot more stuff in comparison to their overall size at this point in time, you would expect them to have and take their earnings such as the utility companies or a phone company that already has the phone lines up, for example, and give it back to the owners in the form of dividends. Dividends to us as the owners would be the income. So that's the type of fund we're looking at. Usually these are the kind of funds that we want to be more heavily weighted towards when we're closer to our end goal, say retirement, for example, because we might be living off of the income of the income fund as opposed to trying to have them grow the company, for example, at that point. Okay, such funds usually hold a variety of government, municipal and corporate debt obligations, preferred stock, money market instruments and dividend paying stocks. So if we're thinking about income, let's pretend we're in retirement, we've got our nest egg is tucked away. We don't really want to tap into the nest egg itself, but we'd like it to just grow and we live off the earnings of it. So we might say, okay, well, then they might have government or municipal debt instruments like bond, for example, and bonds pay interest. So if they pay us interest, then we can live off the interest and that would be great. And then they might have the preferred stock, which we noted was kind of between an equity and a bond, but it kind of acts like a bond where it's pretty much fixed payments. So that would be we can live off the proceeds for the preferred stock with the preferred dividends, the money market instruments, fairly liquid instruments that could be paying the interest here. And then the stocks when we're investing in equity stocks, that's when we're thinking about the companies that are typically more established companies, oftentimes at that point, because those are the ones that are often likely to pay the higher dividends, which are going to be the income to us. So the basics of income funds share prices of income funds are not fixed. They tend to fall when interest rates are rising and to increase when interest rates are falling. So we've got this kind of kind of what's going to happen in relation to what's happening with interest rates. Generally, the bonds included in the portfolio of these funds are investment grade. The other securities are of sufficient credit quality to assure the preservation of capital. There are two popular types of high risk funds that also focus mainly on income. You've got the high yield bond funds that invest primarily in corporate junk bonds and the bank loan funds that invest in floating rate loans issued by banks or other financial institutions. Income funds come in several varieties. The primary differentiation involves the types of securities they invest in to generate the income. So if we want income fund, we're kind of in retirement. We've got our nest egg possibly. That would be a general scenario oftentimes for an income fund. Now we want to try to get some income. What kind of income will be dependent upon what we're investing in? Is it bonds? Is it preferred stock? Is it common stock? So money market funds. Money market funds generally invest in certificates of deposits, these being the CDs, commercial paper and short term treasury bills. So these funds are designed to be very safe investments aiming to maintain a low share price at all times, but they also tend to offer relatively low yields. While these funds don't carry the federal deposit insurance corporation, that's the FDIC insurance, that the bank products do, money market funds have traditionally provided a high degree of safety. So if you're parking your money in the money market fund, you're not getting a lot of exciting activity there. Even for a fixed income, you're probably not going to get a lot of the interest on that type of investment, but it's a fairly safe investment. Now, if you put your money in the fund, you might not have the capacity to get that federal deposit insurance corporation. If you put your money in actual CDs within a bank, for example, and you might stagger the CDs that you're holding in a bank so that the maturity dates are staggered and that kind of thing, then you might be able to get a little bit more security in the event that there's like a run on the bank or something like that with the federal deposit insurance corporation. Although you do have diversification with the funds because they're investing in multiple different kinds of funds. Also just note the ease that it would be to take the money out of a money market fund versus parking the money in like a CD where you might have to keep it in there or be penalized if you were to take it out. So there are pros and cons there. So the bonds funds. So then bond funds typically invest in corporate and government bonds. Government bond funds carry virtually no default risk and therefore can act as a safe haven for investors in times of uncertainty but normally offer lower yields than comparable corporate bond funds. So now we're going to say, hey, look, maybe I can get a higher return than just putting my money in the bank or possibly even CDs, possibly putting my money in the bonds. And we can think about bonds as we have talked about in prior presentations as kind of like we're lending money to the issuer of the bond that either being a government entity or a corporation. Typically the corporate government entities, I should say are usually the ones that we want to compare to as kind of like the baseline, the ruler that we're going to be comparing to because if we're talking about US government bonds, they can basically print money or tax people. So you would think it's almost impossible for the government bonds to be defaulted on, meaning they don't pay them because the government went bankrupt or something. So the risk there is very low. That means also, however, that if you invest in the government bonds that you're not going to get as big a return because the risk is so low. And then if you look at corporate bonds in comparison, you'd say even the large corporations would be more risky than putting my money into government bonds who can basically print money to pay off the bond if they really needed to. So you would expect the corporate bonds to have higher interest rates. If we're living off the bonds, we want to have as low risk as possible. We would like to have all our money in the government bonds in that case or much of it so that it would be low risk. But we're not going to get as big a return. If we want the higher returns, then we might be going into more corporate bonds that might have a higher returns or foreign government bonds and so on that might give us a higher return, which is what we're trying to live on because we're imagining kind of we're in retirement living on our nest egg here with the money coming from. So corporate bonds carry the additional risk that the issuer may not be able to make principal or interest payments. As a result, they tend to pay higher interest rates to account for the additional risk. Corporate bond funds can be split into investment grade bond funds and below investment grade or junk bond funds. Equity income funds, many companies pay dividends on their stocks. And now we're on the stock side of things. So if we're on stocks and we're in retirement, we're trying to get some money here. We want our nest egg to give us salaries like a money so we can spend on our food. So we want the stocks that are going to give dividends. Funds invested primarily in stocks that pay regular dividends are known as equity income funds. So those are typically the more established ones, right? So these types of funds are especially popular among retired aged investors that look to live off the predictable monthly income generated from their portfolio. Right? So I want my dividend fund to come in and I'm going to get that midday special at the local restaurant with it. So historically dividends have provided a significant percentage of a stock's total long term return. Other income funds, other income producing funds includes those focused on real estate investment trusts, those being the RITs, REITS, master limited partnerships, those are the MLPs and preferred stocks. So example of an income fund, you got the TE raw price equity income fund has $17 and $51, 17.51 billion dollars. In net assets as of Q1 quarter one 2021 and seeks a high rate of growth through high dividend paying stocks in combination with capital appreciation. The fund, which distributes payouts quarterly, paid a dividend of 18 cents per share on December 14th, 2020. The fund was performed relatively in line with its benchmark. An investment of $10,000 in the T raw price equity income fund at inception in 1985 would be worth around 24. I think there's an added zero here. I think it should be 24,500 about as of February 28th, 2021. The lipper equity income funds average result for the same amount over the same period would be about 25,150.