Earning Income from Mutual Funds

More than half of working Americans are concerned that they may not have enough money to live comfortably during retirement (see chart). For most retirees, income will come from multiple sources. It may be helpful to consider mutual funds as a potential source of retirement income.

Mutual funds enable you to invest in a portfolio of securities that are typically assembled and managed with a particular goal. In 2010, mutual funds were the most common type of investment held in IRAs and defined-contribution plans.¹ Although you might think of mutual funds as a tool to increase savings, they can also generate income.

Understanding the different types of income-producing mutual funds may help you better evaluate the role they could play in your retirement portfolio.

Bond Funds

Bond funds invest in bonds and other debt instruments. The type of debt held typically varies according to the fund’s focus and stated objectives and may include debt issued by government agencies and private entities, with maturity dates ranging from 30 days to 30 years. These funds generally use the interest payments collected from their bond holdings to generate income for shareholders. Although there is risk with all investments, bonds are usually more stable than stocks but they may offer lower potential returns.

Bond funds are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund’s performance.

Equity or Stock Income Funds

Not all stock funds focus on capital appreciation. Many strive to generate income by investing in companies that have a history of issuing dividends to their common and preferred stockholders. Stock funds typically offer greater risk with greater potential return than bond funds, but income-producing stock and equity funds tend to own stable and well-established companies, such as blue chips and utilities.

The return and principal value of mutual funds fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

Hybrid Funds

A hybrid fund (also called a balanced fund) may invest in a combination of stocks, bonds, and cash alternatives. Hybrid funds attempt to provide a mix of income and capital appreciation, with the fund manager adjusting the fund’s holdings based on economic conditions and in keeping with the fund’s stated objectives.

Income-producing mutual funds tend to be more appealing to investors with a conservative outlook and moderate to low risk tolerances. As you look to generate retirement income, consider mutual funds in the mix.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

1) Investment Company Institute, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.