Income funds: Ease the pain of low interest rates                                                                                                                                                                                                   28 July 2010 Pensioners whose investments have taken a knock from chronically low interest rates can ease the pain by moving from money market funds to income funds. Many pensioners have tried to sit out the steady decline in interest rates in the hopes that they will increase again sooner rather than later. However, we do not expect interest rates to increase in the short term, which means that pensioners who have tried to sit out the rate slump will continue to feel the strain as returns from money market investments remain low. Pensioners in this situation should consider a change of strategy. Two years ago, a risk-averse investor looking at fixed-interest options could simply pump cash into money market funds and receive a 13% return. After successive rate cuts, the return is down to 6% and closer to 4% net of tax. Particularly for less well-off pensioners this can mean real distress. At BJM Wealth, our specialists believe that money market funds remain an ideal “parking place for cash” when the investment horizon is three months or less. However, if you are able to manage without the cash for longer, even if it’s just six months to a year, better returns can be achieved from a good income fund option at only marginally more risk. This type of product employs a mix of corporate and government bonds, preference shares, other fixed-interest products and cash. For example, at least one highly regarded income fund showed a six-month return of 4.67% at a time when money market funds were averaging 3.26%. The difference, says BJM Private Clients MD, Tony Barrett, is significant for pensioners and others that depend on returns from interest-linked products. “Historically, the best long-term returns are achieved by equities, but volatility has been high. Many conservative investors and older people are therefore a little nervous at the moment. The tragedy for those who don’t need ready access to all of their cash is that it is possible for a portion to be committed into income-type funds, thereby earning a better return and cushioning some of the financial pressure they are under.” Following the right advice at the right time can make a material difference to your life and your investments, especially when you are in a situation that every rand can make a difference. It is important to remember that investment needs and profiles vary for each person and that professional advice from qualified financial planners should be sought whenever possible. For more advice on the yield curve advantages of income fund exposure in a low interest rate environment, kindly contact your BJM Relationship Manager on 0860 001 652.

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