Corporate Bonds vs Equity Income Funds - any thoughts?

margaretclare

As an older person who's still interested in saving, I'd welcome a discussion on the above. I've read the pros and cons from Hargreaves Lansdown and I know I can't get advice - am not asking for any. Just a discussion.

Either the corporate bonds and/or the equity income funds can be held within their ISA.

Living in an uncertain world and not knowing what DH's and my future needs may be, I still like to save and that means obviously, I'd like a better return. 5 years into the future, possibly 10. Any thoughts, MSEs?

jon3001

Is this to generate income? I'd say a mix of both is best for diversifying income streams and reducing risk. You could even add other asset classes in due course such as property funds as the yields become more attractive.

To further reduce downside risk I'd suggest phasing the money in.
6-12 months for bonds.
12-24 months for stocks and other riskier assets.

dunstonh

Ignoring timescale and economic issues at the moment, generically corporate bonds are lower risk than equity income funds. Also, any decent portfolio would have both and not be exclusive in one or the other.

There are fund supermarkets that do offer death guarantees as well. So, if you do fancy a go at investing later in life but concerned about losing money that would be passed to the surviving spouse, then using a fund supermarket that guarantees to pay out the full value on death or the original investment, whichever is higher, could be an option worth considering.

In addition to those two areas you mention, you also have the likes of schroder income maximiser (in the specialist sector) and high yield bonds, international bonds and a range of other fixed interest sectors. A spread is usually the best way.

margaretclare

Thank you to both for the thoughts.

I'm not sure what you mean about 'concerned about losing money that would be passed to the surviving spouse'. Obviously, if my spouse survives me then everything I leave behind is his. Fine. I'm not concerned about 'losing' money - I know I can't take it with me!

Thanks for the reminder about the spread - at present I'm looking at both bonds and an equity income fund.

It isn't to generate 'income' - no matter how late in the day, it's an attempt to grow a little capital. Income is to be re-invested to grow.

Thanks again.

Myrmidon_J

margaretclare wrote: »

It isn't to generate 'income' - no matter how late in the day, it's an attempt to grow a little capital. Income is to be re-invested to grow.

I think equity income and corporate bond funds (particularly the latter) are most useful in delivering an income - so, if this is not your goal, equity growth funds might be preferable.

Whilst I do not understand the full extent to which this applies, the internal taxation of the funds (quite different, for income / growth funds) can affect investment returns in the long-term.

What is your attitude towards investment risk?

margaretclare

What is your attitude towards investment risk?

It has to be cautious. The few thousands of savings I'm considering putting into this - £3600 in the next tax year - have been acquired with some difficulty. I haven't time or opportunity to go out and earn more, but OTOH there is pensions income, I don't need it all to live on, and DH and I do not know what we may need in a few years' time.

I've read that an income-based fund can also be used for growth, if the income is reinvested?

Myrmidon_J

margaretclare wrote: »

It has to be cautious.

With the greatest of respect, most equity income funds would not be described as "cautious" investments. The IMA UK Equity Income sector is down 27.84% over one year, and although investment conditions are exceptional, could you tolerate these losses?

I've read that an income-based fund can also be used for growth, if the income is reinvested?

You are quite correct. Some equity income funds automatically reinvest dividend payments. However, equity income funds have a certain mandate - at the most basic level, to derive an income from equities (!!) - and will therefore invest in different stocks than, say, a "growth" fund.

The fund itself (as well as the income you receive) is taxed internally and as equity income funds achieve a (relatively) high percentage of "growth" from reinvested dividends, if your sole aim is to "grow" capital, there may be better options in other sectors.

I'm not clued up enough to comment on the specifics, unfortunately!

barny_100

Myrmidon_J wrote: »

I think equity income and corporate bond funds (particularly the latter) are most useful in delivering an income - so, if this is not your goal, equity growth funds might be preferable.

Here's a question I have. Surely I'm only interested in the return on my investment long term. Working on the basis I'm reinvesting income I assume having an income fund as part of a mix is no bad thing? I understand that with growth as the aim the chances of higher returns are likely to be better but if you are reinvesting income surely good income funds also "grow"?

Short version I guess is if you are happy with, for example, 6-7% growth a year does it matter if its from capital growth or reinvested income?

margaretclare

barny_100 wrote: »

Here's a question I have. Surely I'm only interested in the return on my investment long term. Working on the basis I'm reinvesting income I assume having an income fund as part of a mix is no bad thing? I understand that with growth as the aim the chances of higher returns are likely to be better but if you are reinvesting income surely good income funds also "grow"?

Short version I guess is if you are happy with, for example, 6-7% growth a year does it matter if its from capital growth or reinvested income?

That's what I've been trying to explain.

It could be a good time to 'buy in' when everything is so low - couldn't it?

Myrmidon_J

barny_100 wrote:

Surely I'm only interested in the return on my investment long term. Working on the basis I'm reinvesting income I assume having an income fund as part of a mix is no bad thing? I understand that with growth as the aim the chances of higher returns are likely to be better but if you are reinvesting income surely good income funds also "grow"?

You're quite correct: a good equity income fund with dividends reinvested will indeed "grow". The point I was trying to make (apparently unsuccessfully!) is that the internal dynamics of these funds affect investment returns...

Equity income funds pay dividends to investors,
Dividends are taxable,

Corporate bond funds (and fixed interest funds, etc.) pay "interest" to investors,
Interest is taxable,

Crucially, tax is still payable on reinvested income.

Growth funds generally derive a higher percentage of their total returns from capital growth within the fund (disposal of assets at a higher price than their book cost); accordingly, investors also derive a greater percentage return from capital growth.

Dividend payments are taxed at 10% in an ISA wrapper, whilst Capital Gains Tax is not payable. In addition, investors can make use of their annual allowance (outside an ISA wrapper).

So, if an "income" fund returned 10% internally, and a "growth" fund returned 10% internally - the growth fund would deliver a higher net return to investors (i.e. after tax).

The income fund is more versatile, and indeed, you may prefer the method of stock selection: (generally) a larger percentage of blue chip companies that pay high dividends. (Contrast the growth fund, investing in companies with the potential for capital growth perhaps at the expense of dividends.)

It's all a bit of a mine field, but I would repeat my earlier warning: UK Equity Income and UK All Companies funds are not consistent with a "cautious" risk profile, whatever the markets look like!

margaretclare

Thanks for this.

So it looks as if any equity income fund is 'out', as being too risky. However, I'm not entirely convinced. Nothing in the world is without risk, and I'm otherwise stuck with building society savings at 2.5% or so. That's not going to grow much capital!

As regards tax, this was meant to go into a stocks and shares ISA, so no tax.

Would it make sense to place the whole £3600 into corporate bonds within the S & S ISA?