Should You Stop Investing in Equity Income Funds?
Over the years, equity income funds have been the investment of choice for most investment portfolios.
Why so popular? Equity income funds have been touted as an investment to suit both good and bad markets. They deliver capital growth – increasing the sum of your original investment – while also providing a regular income in the shape of company dividends.
Understanding Equity Income Funds
As you would expect, an equity income fund is designed to provide investors with a portfolio of shares (or equities) that will deliver a strong and consistent stream of income.In order to be classified as an equity income fund, a fund must provide investors with an income (or yield) in excess of 110% of the total yield from the FTSE All Share index of companies. The current average income yield on the FTSE All Share is around the 3.0% mark, so to qualify an equity income fund must yield at least 3.3%.
Bear in mind that the yields currently available on most high street savings accounts are below the 1.0% mark then it is easy to see why such an investment would be popular.
In terms of types of companies equity income funds invest in, they tend to go for less risky companies in traditional ‘defensive’ areas of the market, for example utility companies (such as gas an electricity suppliers) and tobacco companies. These type of solid, low-risk companies tend to pay high levels of dividends to investors.
Reinvesting Dividends For Growth
If you prefer your money to grow and you don’t need to collect a regular income from your investment, equity income funds also enable you to reinvest your dividends back into the fund, to help your investment grow.The Impact of the Financial Crisis
However, the sector has performed disappointingly during the recent downturn. The recent stockmarket falls and the impact of the financial crisis have tarnished the reputation of some equity income funds.According to the Investment Management Association (IMA), the UK equity income sector has fallen by more than 30% over the past twelve months, a pretty poor return on anyone’s investment.
So, are equity income funds about to fall out of favour with investors, or can they recover the former reputation?
Is the Party Over for Equity Income Funds?
There’s no doubt that over the past year or more, equity income funds have taken quite a battering. However, if you currently own an equity income fund, now may not be the time to give up and sell your holding.In fact, if you sell out of your fund at a loss then there’s no chance of seeing your investment recover to former levels, which could happen once the recession starts to subside.
Reasons to Keep Faith With Equity Income
The reasons why investors have been such keen fans of equity income funds remain, even if their performance has been disappointing of late.Whatever your attitude to risk, or your age, an equity income fund should be the backbone of anyone’s investment portfolio. The combination of capital growth and regular income makes an equity income fund ideal for regular savers.
Because these funds have fallen so heavily, this means that you can purchase units into them for a bargain price of 30% less than you could a year ago.
Furthermore, during a recession, most investors would prefer to invest in large, blue-chip reliable companies such as the type favoured by equity income funds, instead of smaller companies with a greater likelihood of going bust.
Also, with interest rates so low, the advantages of keeping your savings tucked away in a bank are very limited. Therefore a consistent income of more than 3.3% is still attractive for those investors seeking income.
So, although you may be frustrated by the return from your equity income fund, the chances are that you are still earning a rather good yield on your investment. With equity markets still looking volatile, investor may find that doing nothing might for once be the best course of action. Sometimes in investing, a little patience can work wonders.
