What do I need to know about funds that pay returns?

We explain the main features of funds that pay returns.

Funds that pay returns are traditional investment funds designed to provide investors with a recurring income in the form of periodical returns: monthly, quarterly, half-yearly or annually.

We can find these funds in different types of assets, meaning they invest in equities, fixed-income assets or a mixture (balanced funds). Given the current market environment, in which interest rates have been falling in recent years, management companies have focused their range of funds that pay out returns in balanced funds, i.e. those which invest in both equities and fixed-income assets.  

In addition to paying out returns, these funds seek to profit from the revaluation of the capital, i.e. investing in ideas which they believe can generate better results.

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How do they achieve the returns that they distribute?

When designing the investment portfolio, the managers of these kinds of funds seek to obtain a stable return. To do this, they focus on companies that allow them to profit from the dividends that they distribute and, on the other hand, they select fixed-income securities, of both government and corporate debt, that offer recurring coupons.

Additionally, we can find funds that allocate a percentage of the portfolio to strategies with other financial instruments, such as options. In this case, they sell options to profit from the premium (receiving an amount for their sale) and to obtain extra returns.

Ways of distributing the returns

Depending on the design of the fund, there are two types of funds that make payouts:

  • Funds that pay investors the dividends received from the companies in which they invest, the coupons received periodically from the fixed-income investments, and the premiums from the options in the portfolio, if this strategy is included (as explained above).
  • Funds with a fixed return: if the dividends and coupons generated do not meet the established objectives, part of the fund is sold to reach the promised level.
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To be taken into account

  • It is important to point out the tax impact that these investments can have, since the dividend obtained is taxed, whereas the kinds of funds that are based on profit accumulation (dividends are reinvested in the fund instead of being distributed to investors) are only taxed when the shares are sold. 
  • These are investments that carry risks associated with investing in equities and fixed-income securities. They are subject to the volatility of the equity market, as well as to interest rate variations, possible bankruptcies and currency risks.
  • The fund we decide to invest in must be selected carefully since, in the search for greater returns, the portfolio may be made up of assets which carry greater risk.
  • Funds that include options can be affected by fluctuations in the volatility of the options market.
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