Why now could be a great time to invest in income funds

• Income funds are focused on assets that generate stable returns such as dividend stocks and certain types of bond, potentially alongside commodities and other alternative assets.
• They are designed to be managed in a disciplined way to provide regular income to investors, which can lead to a more measured and steady approach.
• Many income funds are diversified across asset classes to smooth out the effects of turbulent and uncertain market conditions.

As the name suggests, income funds aim to offer investors a regular income, which may be paid monthly or annually (learn more about income funds). They contrast with accumulation funds, in which income in the fund is reinvested.

Income funds have several characteristics that may be attractive in the current environment. First, they may include allocations to bonds – especially bonds with relatively low interest-rate risk, such as short-duration bonds and floatingrate notes. Investors are historically underweight bonds, yet bond yields – the annual return offered by a bond, expressed as a proportion of its price – have increased considerably compared with recent years. Higher bond yields are important because they both offer a better potential return as well as a cushion against any possible rise in interest rates.

Second, income funds are deliberately tilted towards assets with a more stable return profile. Where they invest in stocks, income funds tend to focus on companies that pay good dividends, which in practice means well-established and stable businesses with less volatile prices. Coca-Cola and Proctor & Gamble are two examples of stocks with a long track record of paying dividends. These names contrast with “growth” stocks, whose price is expected to grow at an above-market rate but with volatility and typically little or no dividends – think Nvidia, Amazon and Tesla.

Third, income funds may be structured in such a way to control volatility. Some, such as multi-asset funds, may invest in a range of asset classes that are not closely correlated to stock prices. These may include so-called alternative assets such as private equity or private credit, or commodities such as oil or gold. Multi-asset funds may also be managed with integrated risk and volatility management to help limit fluctuations in the unit price to a preset range.

For investors, income funds may offer several potential benefits in the current environment. Because of the requirement to provide regular income, these funds have to be managed in a disciplined way, which can lead to a more measured and steady approach. That is an attractive feature in a global economy where tariffs and trade wars threaten to upset economic flows, and where an enormous amount of investor capital is predicated on fast-moving and unpredictable technology. The sharp fall in the US stock market that followed news of Chinese start-up DeepSeek’s new and competitive AI product reveals how shaky some US equity valuations can be.

Then there is the interest rate environment to consider. Although rate cuts are expected in Europe, minutes from the US Federal Reserve show policymakers are worried about the possibility of new tariffs pushing up inflation. “Higher for longer” interest rates are potentially challenging for holders of core bonds, such as US Treasuries; however, alternative fixed income instruments may be less affected. These include floating-rate notes, which have coupon payments that periodically reset up and down according to short-term interest rates.

Income funds may use these types of bonds, alongside others such as short-duration high yield bonds, for example, or convertibles, which are bonds that include the option to be converted into stocks. Convertibles can be seen as offering a kind of “built in” protection against falling stock prices.

Connected to the “steady and reliable” theme is the concept of diversification. The US stockmarket has enjoyed a 15-year bull run, during which time bonds have frequently performed poorly. But our recent research on “breaking the barbell” found that this period of equity outperformance versus bonds is unprecedented in the last 65 years. The only period that came close was the dot-com bubble in the late 1990s, which was followed by a substantial three-year stock market correction.

Getting the balance right between stocks and bonds is likely to be crucial to protect and build wealth in the coming years. In an actively managed, multi asset income fund, the fund manager has the ability to adjust the balance between stocks and bonds in response to market conditions, helping to manage risk and provide more stable returns. 

Income funds are not necessarily the right option for every investor. For those with aggressive return expectations, or a very long investment horizon, funds tilted towards risky assets such as growth stocks may be the appropriate choice.

But for investors with a preference for more stable returns without big swings in price, or who are using their funds to support their present lifestyle, income funds may well be a good fit. In today’s environment of volatile stock prices, “higher for longer” interest rates, and an unpredictable US administration, they might be more relevant than ever.