A Different Twist on Income
MoneyWise Autumn 2006
If you want an investment that includes shares and you want a high income, then the traditional solution has been to invest in UK equity income funds. However, with the UK stock market currently yielding around 3%, few UK equity income funds now yield much over 3.5%. Even after the base rate rise, this compares reasonably well with deposit accounts, although unlike a deposit, the value of your investment can go down as well as up.
If you want a higher income, there are now a small number of funds that offer a markedly higher yield – up to around 7% – while still providing some exposure to equity markets. These funds have a variety of structures, but a key feature they have in common is the use of an investment technique that turns potential future capital gain on shares into an immediate income. This approach has recently become more readily available for funds marketed to the public, although the large institutions have taken advantage of the strategy for many years.
The high income has a price in terms of correspondingly reduced growth prospects for the fund: there is, as you would expect, no such thing as a free lunch or free extra income. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. The yields quoted are estimates and are not guaranteed. These funds make use of derivatives that involve a higher degree of risk and can be more volatile than equities.
Want less risk? If you want a fixed, guaranteed income, ask us about the current income bond offers. These can be particularly attractive for higher rate taxpayers.
