Investment Objectives
The main consideration in choosing a fund is whether you are aiming for capital growth, income, or a balance of growth and income.
How you go about this depends on your attitude to risk. On the one hand, you can concentrate on growth funds as classified earlier. Most growth funds fall into the higher-risk category (3 to 4 on our scale) and are likely to pay small dividends.
An alternative strategy for the more risk averse is to select income funds that aim to generate healthier dividends and to reinvest them in more units/shares. This builds up your capital.
Capital growth can also be enhanced by sheltering funds in ISAs or PEPs.
For the risk averse, corporate bond and gilt funds can generate decent levels of income, although capital growth is likely to be low and the funds are vulnerable to changes in interest rates.
Some of the high yielding corporate bond funds contain debt instruments of lower quality and, ergo, higher risk.
Income can be enhanced by sheltering the funds in an ISA or PEP. Peculiarly, corporate bond and gilt income distributions will be unaffected by the taxation of dividends arising out of ISAs and PEPs from 2004.
Equities and equity-based funds provide a source of growing income which often outperforms fixed deposits over the long term, although it will start out lower.
Capital growth on Balanced Funds can be used to subsidise income through simultaneous capital withdrawals. Fund management groups often arrange a set of balanced funds to generate a dividend in each month of the year. Simultaneous capital withdrawals can bring the total of income and capital up to a predetermined level. This can work very well over the longer term provided that the rate of capital withdrawal is not too high. Investors can enjoy capital growth and a rising income, which may be only partially taxable because the realised gains on disposal of the units/shares falls within the annual CGT exemption.
At present, dividend income can be enhanced by sheltering the funds in ISAs and PEPs, but this advantage will be less effective from 6 April 2004 when the tax credit is no longer reclaimable.
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