ISA season is upon us, and as the tax year deadline looms, you may well be looking for a smart addition to your portfolio that can boost your income.
According to Fidelity International, 39% of UK investors view generating more income as their primary investment goal for the next year. But what are the top funds that can help boost this income?
“The ISA allowance of £20,000 provides an opportunity for UK investors to build a tax-free income portfolio,” says Tom Stevenson, investment director at Fidelity International. “With the right investments, your ISA can become a powerful source of additional income, helping you meet your financial goals and secure your financial future.”
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Many investors are unaware that the ISA allowance resets every year. “ISAs are a cornerstone of tax-efficient investing in the UK, but it is important to understand that they are a ‘use it or lose it’ allowance,” says Jason Hollands, managing director at investment platform Bestinvest by Evelyn Partners. “Don’t let this allowance slip away – it doesn’t roll over,” he adds.
Remember, your £20,000 allowance can be spread across multiple ISAs; you can still add investments into a stocks and shares ISA even if you’ve contributed into a cash ISA already, as long as the total invested is less than £20,000 this tax year.
Stevenson has picked out four funds that could help increase your income next year, if you’re looking for income inspiration.
Fixed income – a fund for bonds
One of the first ports of call for investors seeking to add income to their portfolios is through bonds.
“Most income investors will normally allocate part of their portfolio to fixed interest, which generally offers a predictable yield at a lower level of volatility than equites,” says Stevenson.
The M&G Corporate Bond Fund keeps its investments relatively safe by investing at least 70% of assets into investment-grade corporate bonds, though it is also able to invest into government bonds (such as gilts) and high-yield debt.
“The fund mostly invests in lower risk companies and hedges any foreign currency exposure back to sterling but would still be affected by changes in inflation and interest rate expectations, as well as other such factors,” says Stevenson. He is also a fan of the fund’s manager and team of analysts that assess the creditworthiness of the issuers it holds.
Dividend stocks – a global income fund
Picking the right equities can also yield income in the form of dividends.
Dividend stocks “tend to have a lower starting yield than fixed interest but offer the prospect of rising distributions and capital growth,” says Stevenson. He suggests Fidelity’s Global Dividend Fund for investors seeking this type of exposure.
“Longstanding manager Dan Roberts has a conservative approach that focuses on stocks with predictable, consistent cash flows and simple, understandable business models with little or no debt on their balance sheets,” says Stevenson.
An infrastructure fund as an alternative form of income
Infrastructure investing is a tricky area, but get it right and it can offer steady, inflation-linked income as well as capital growth.
However, because most infrastructure companies aren’t publicly listed, and are seldom particularly liquid assets, a specialist vehicle like an investment trust is usually the best means of investing in infrastructure.
Stevenson’s pick is the International Public Partnerships Ltd (LON:INPP). INPP, he says, “owns essential, low risk assets such as schools and hospitals, transport and renewables that tend to be held in partnership with the government and subject to long-term contractual arrangements.”
Distributions have increased every year since the trust’s launch in 2006, making it one of the next-generation dividend heroes according to the Association of Investment Companies.
A fund for diversified income
The Ninety One Diversified Income Fund offers a convenient way to diversify your exposure – thereby reducing your risk – whilst still maintaining a focus on income.
“The fund aims to keep the risk to less than 50% of that of the UK stock market as measured by the FTSE All-Share Index,” says Stevenson. It invests in bonds, dividend stocks, infrastructure and property.
Over the five years to December, its annualised volatility stood at just 5.6%.
