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What is an Income Fund?

For many investors seeking stable returns and regular payouts, the abundance of income fund options available can be exciting and full of opportunities. 

In this guide, we’ll explore income funds, and you’ll also learn its various types and understand why these kinds of investment vehicles deserve a spot in your portfolio. 

Amur Capital offers a simple way to grow your money and receive a stable and consistent return. Contact us now, and we’ll help you start in a few minutes.  

Key Takeaways:  

  1. Income funds are a reliable option for stable returns and regular payouts. 
  2. There are several types of income funds, from bond and money market funds to mortgage funds, each offering different investment opportunities and income streams. 
  3. With a balanced approach and consistent returns, Amur Capital Income Fund makes investing easier for Canadians looking for financial stability and growth. 

What are income funds?  

Income funds are investment vehicles similar to mutual funds, which means they pool funds from investors to invest in various fixed-income securities, such as stocks, bonds, and mortgage-backed securities. They are called fixed income because they offer a fixed dividend payment to their investors (unitholders). 

Since an income fund prioritizes long-term growth and steady cash flows to its investors, it is generally considered a low-risk option. This makes income funds a popular source of income among retirees and passive income for other investors who want to avoid assuming high levels of risk. 

How do income funds work?  

As mentioned above, income funds are pooled funds invested in a portfolio of fixed-income instruments. These funds are managed by fund managers who allocate the fund’s assets to achieve its objectives: long-term growth, balanced income, or high yield. Depending on the fund’s objective, some income funds offer both a steady stream of income and an opportunity for capital appreciation. 

 An income fund’s net asset value (NAV) represents the value of its assets against its liabilities. For example, an investment company that has invested in assets and securities worth $10 million and liabilities of $2 million has a NAV of $8 million ($10 million – $2 million). 

Investors (or unitholders) then receive payouts as dividends, interest income, or additional shares according to their proportionate number of shares in the fund. 

Types of income funds in Canada 

Income funds vary depending on the types of securities they invest in. 

Bond funds

Bond funds invest in corporate and government bonds that pay investors regular interest yearly. When the bond becomes due, the issuer must pay back the bond’s face value in full, including the interest.  

There are two types of bond funds: government and corporate bond funds. Government bond funds usually have lower yields than their corporate counterparts, and they have lower risk since the government backs them. Corporate bond funds carry a default risk, which means the company or issuer cannot make principal or interest payments. Corporate bonds tend to pay higher interest rates for this added risk. 

Equity income funds

Equity income funds invest in dividend-paying stocks issued by companies. Because of these funds’ steady income stream, they are popular with retirees who would like to receive anticipated monthly income and individuals looking for passive income. However, the dividend amount received will be proportional to the number of shares or equity an investor has in the company. 

While a monthly income fund offers regular payouts, it also allows for additional returns through capital gains or when the fund’s assets appreciate. 

Money Market funds

Money market funds are mutual fund investments in short-term debt securities, such as Treasury bills (T-bills) and certificates of deposits (CDs). An initial investment in a money market fund typically requires a low minimum balance, making it accessible to many investors. Unlike most bank products, money market funds do not carry federal deposit insurance coverage.  

Real estate investment trusts (REITs)

A real estate investment trust is a legal entity that pools investors’ money to purchase income-generating properties, which are then managed and operated by a trustee corporation. REIT properties may include apartments, data centers, hotels and office buildings. 

Modeled after mutual funds, REITs allow investors to leverage the real estate market without buying or managing rental properties themselves. Investors earn money through dividends or buying and selling individual REITs in the secondary market. 

Mortgage funds

A mortgage income fund is an investment vehicle that uses mortgage-backed securities. Like REITs, investors can gain exposure to the real estate market without buying or managing a property. There are several types of mortgage funds, with Mortgage Investment Corporations (MICs) being one of the fastest-growing segments in the market. 

It works like this: investors invest their money in a MIC, which the MIC then invests in a portfolio of highly diversified mortgages. When the MIC earns its income from the mortgage interest and fees paid by borrowers, all of the profit is passed on to investors as dividends. 

An investor holding a miniature house model.

Benefits of income funds 

Supplemental income stream 

With most income funds paying regular monthly income, investors looking for a stable income source may find these funds a suitable choice. Investors looking for passive income may also consider income funds in their portfolios. 

Potential capital growth 

The common notion of income funds is that they focus on generating regular income at the expense of higher returns. However, not all income funds are created equal. Some income funds, like Amur Capital Income Fund (ACIF), provide a balanced approach to generating stable, regular income for investors while offering high potential returns. 

ACIF’s average rate of return in the past ten years is 9.61%. In contrast, the rate of return of the S&P/TSX Composite Index for the same period is at 7.64%. 

Professional management 

As mentioned, various entities offer income funds, from private investment firms and banks to government agencies. In these entities, the funds are actively managed by professional portfolio and fund managers, meaning any investment decisions are based on extensive research and expert market analysis. 

Drawbacks of income funds 

Income fluctuation 

Share prices of income funds can change depending on several factors, interest rates being one of them. In the case of bond funds, rising interest rates can lead to declining bond prices because new bonds with higher yields make old or outstanding bonds less attractive. The opposite happens when interest rates fall, as investors can sell the outstanding bonds at more than the initial price or original face value. These fluctuations in share prices can affect the dividends received by the investors. 

Management fees 

Since firms manage income funds, investors may be charged investment management fees. This ongoing annual fee is based on the value of your portfolio, which may affect your long-term investments. 

Considerations before investing in income funds  

Before you invest in anything, consider creating an investment plan. With the myriad of income fund options, here are three other things to consider: 

  1. Tax implications: Income funds can invest in various fixed-income securities, so investors should consider the potential tax implications of investing in such funds, particularly income taxes payable on any dividends or interest earned. With Amur Capital’s fund offerings, 100% of the investment earnings are flowed-through to shareholders, which means they are taxed only once. 
  2. Recurring purchase option: This feature allows investors to reinvest their investment earnings to maximize compounded returns.  
  3. Investment and management quality: Since income funds are actively managed, their success will depend mainly on the investment experience, expertise, and style of the fund management entity. Since 1984, Amur Capital’s MICs have provided Canadian investors with stable historical returns and have never posted a negative return, even during the worst economic climates. 

Invest in an income fund with Amur Capital  

There are many things that will dictate the suitable investment for you: your financial goals, risk tolerance, time horizon, and others. However, as investors seek reliable and steady income streams, income funds emerge as a viable and attractive option. 

At Amur Capital, we offer a variety of investment options, and our funds provide a consistent track record of stable returns. With Amur Capital Income Fund (ACIF), investors can benefit from a balanced approach to investing backed by high-quality mortgage investments in real estate. And with tax-advantaged returns through registered plans like the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP), maximizing the returns on your investments is easier. 

Experience the simplicity of Amur Capital’s Income Fund – a trusted choice for those looking to achieve their financial goals with confidence. Connect with our investor relations team today. 

Frequently Asked Questions

Some of the most common examples of an income fund are bond funds, equity income, and money market funds. Other types include Real Estate Investment Trusts (REITs) and Mortgage Investment Corporations (MICs).

Yes, income funds can pay dividends.

The right type of investment will depend on your financial goals, risk tolerance, and time horizon. This means you can choose either one to supplement your investing strategy. It is also possible to invest in funds that allow a steady income stream and continued growth.

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