What is an enhanced income fund unit trust and how is it different from an income fund?
Enhanced income fund unit trusts are a ‘super’ version of conventional income funds. The goal set by most enhanced income fund managers is to deliver the best income yield possible but with an important requirement – it must be done at an acceptable level of risk.
This is great news for retirees who need to create income at a low level of risk… But it’s not just retirees who’ll benefit from this type of unit trust investing.
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Six reason to invest in an enhanced income fund unit trust
Here’s why The South African Investor’s Leon Kok believes enhanced income fund unit trusts are a good investment:
1. Better returns: Like income funds, but with better income prospects, enhanced income funds are good if you want income levels that are better than those provided by bank deposits and money market funds even though they’re slightly riskier.
2. Great performance: These funds are very actively managed to outperform similar funds.
3. Broad exposure: They tend to have a wide universe such as money market instruments, bonds, listed property and preference shares. Fund managers move actively between these assets, based on a relative value approach. If bonds become too expensive, they down weight, and may possibly move that money into cash.
4. No time restrictions: With no restrictions on the average duration of the portfolio, these funds tend to hold both long- and short-term securities. This gives greater flexibility in taking advantage of interest rate trends and thus to maximise the capital gains and income yields. Income is generally re-invested to generate further growth, or paid out to investors to supplement income.
5. Exposure to a booming property market: With a secondary focus on capital gains, these funds tend to maintain a high quality bond exposure and seek out listed property companies showing good prospects for growth and yield.
6. Low risk: These funds are naturally more risky than money market or income funds, but the underlying management approaches are similar, using marginally more risky instruments. However, they are considerably less risky than either shares or bonds.
In managing the portfolios, managers constantly monitor the performances of the various applicable universes in order to estimate the investment durations of the various assets respectively as accurately as possible. They then structure their funds so that they have durations that are more or less in line with the median, and then attempt to maximise yields so as to outperform the median.
Bottom line: Enhanced income fund unit trusts are great for retirees: They’re especially suited to retirees dependent on fixed interest income who suddenly face interest rates nose-diving and consumer prices spiralling and need to better returns to beat inflation rates.