The Difference Between Balanced Funds and Income Funds


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Evaluating your investment options can be overwhelming as you explore the many available funds. Breaking down your investment options into balanced funds and income funds can help you make informed investment decisions that allow you to diversify while also producing a consistent income.

ALSO READ: How to Handle Taxes on Your Investments

Balanced funds, as the name indicates, offer a balance to your investment portfolio. Some experts recommend a split of 60 percent equity and 40 percent fixed income funds. The great thing about pre-assigning a desired split percentage to your portfolio is that you, or your portfolio manager, can adjust your purchases based on the intended split. Balanced funds tend to be a popular choice because of their convenience. Investors can purchase just one diversified fund, without having to do extensive research.

Disadvantages of Balanced Funds

One of the problems with balanced funds is that no two funds are created equal. Blindly choosing a balanced fund might seem like the right idea, but without digging deeper into the actual stocks and bonds that the fund includes, you cannot really tell how diverse it is. Of course, you could do the research, but that takes away from its convenience factor.

Advantages of Income Funds

Income funds, on the other hand, are purchased with the goal of earning a consistent income over time. They are often purchased in the form of mutual funds, government bonds, or exchange-traded funds. A riskier type of income fund might include real estate investment trusts. While these types of funds may take longer to mature, they can be a great way to supplement your income.

Diversification is one of the biggest advantages of income funds. The stock market generally follows expected trends which means when stock prices increase, bond prices decrease and vice versa. Many income funds include both stocks and bonds meaning you are automatically diversifying with your investment.

Disadvantages of Income Funds

It is important to note that this diversification advantage based on stock and bond trends is not always the case and negative correlations are always a possibility. However, by diversifying your investment portfolio with both balanced and income funds, you can better protect against these market trends.

Because the goal of income funds is to produce a steady income, investors are also subject to income taxes. It is important to be aware of tax expectations and to factor this into your desired income. If your goal is to produce an income through an income fund investment, it is important that you are choosing the right funds and preparing for tax liabilities. A Signature High Income Fund manager can help you choose the right funds while also minimizing your risk of stock market volatility.

Choosing the funds that make up your stock portfolio requires careful consideration and planning. Each purchase should complement the funds that you are already invested in. The risks and rewards should be weighed against current funds until you have a portfolio that allows you to collect income without constant monitoring. A fund manager can be an invaluable tool while you create the ideal stock portfolio.

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