One of the main reasons people invest money is to generate an income. Whether this is to supplement an existing income (such as a pension) or to provide funds to live off, it is vital to ensure that the investment you choose provides the level of income required without eroding the original capital.

There are many types of investment and these can often generate your “income” in different ways. It is very important to ensure that the type of investment and the way that the investment generates income suits your particular needs. For example, if the “income” element of the investment is variable depending on the market performance, but you need a fixed income to live, this may not be suitable to your needs. In this circumstance, it may be necessary to consider a different type of investment which will provide you with a fixed return such as a government bond.

Often, investments do not actually have a dividend or interest payment and are what is called “roll up” funds. It is possible to use a “roll up” fund to generate an income although this is done by selling units rather than through any type of interest or dividend payment. One of the major benefits of a roll up fund is that should you not take any income, the funds will “compound” and enhance the growth of the fund further. So if the fund returns 7% for example, and you only take 5% in income, the remaining 2% will be added to your capital and will grow at the same rate as the rest of the funds.

When investing in this type of fund for income, it is vital to consider how volatile the fund is. The lower the volatility, the better the fund will be for generating an income. Taking income from a fund with high volatility could cause serious problems. For example, if you invest €100,000 in a fund and need to take 5% (€5,000) income per annum, as long as the fund is growing by more than 5% there is no problem. However, if the fund is volatile and in one year falls by 5% i.e. to €95,000 and you take out €5,000 in income then the remaining capital will only be worth €90,000. In order to provide your €5,000 income in the following year AND recover the lost capital, the performance will have to be in excess of 16% in that year – an unlikely situation!

It is therefore vital that when investing for income, the fund or investment chosen suits your needs and requirements as closely as possible. OMM specialise in investments with low-volatility allowing income to be taken and can assist you, whatever your requirements.