Money that is invested in these distribution funds is invested in shares, fixed-interest securities and in the case of the majority of funds, a bit of both. The return is then paid either in the form of dividends or interest which is then split between the investors at pre-determined times. This form of payment is referred to as income distribution which is where the name comes from and this can either be reinvested to add on to the beginning investment amount or if you are looking to invest for income, the profits can be withdrawn.
As briefly discussed earlier, its important to consider when choosing a fund that you feel is right for you what level of risk you are willing to take on. The difficult part though is being able to measure the level of risk as it means different things to different people although typically it is perceived as being the level of fluctuation that can be expected day-to-day.
There are various different types of these funds. Some of these funds are ideal for income investment in addition to capital growth whereas some are income only. When a fund is used to invest in overseas assets, the value can also rise and fall not just based on the value of itâ€™s assets but also currency rate changes. For this reason, it is important to consider what percentage (if any) of the fund is invested in overseas assets. In the case of funds that invest in certain fixed interest securities, the same is true as the value may increase or decrease based on the interest rates as these have a direct impact on the fixed interest rate assets.
For those funds that invest in company bonds, high-yielding bonds are typically lower grade meaning that they are accompanied by a larger level of risk not just to the income potential but to the actual capital as well as if the company who issued the bond goes bankrupt or struggles, the value can drop drastically and perhaps even collapse. Some funds invest more in smaller number of different shares and as such, these less diversified portfolios, are increasingly risky.
With the Income Distribution Bond investors have zero personal liability for the basic rate of income tax or capital gains tax on this bond. Despite this, they may be liable to the higher rate of income tax if you withdraw the entirety of their investment from the bond, or take income or make regular withdrawals.