Peter Spann???

[coopranos]

Without commenting on the Navara fund (as I know nothing about it) I would suggest capitalising interest on an income fund was fraught with “danger” – mmm, too strong a word perhaps.

Really any form of income fund is going to have pretty much a relative “band” of performance if it is going to maintain the risk / return ratio at reasonable levels.

Let’s say (for the purposes of illustration) that an income fund aims to produce 9% PA and that it’s underlying strategy is reasonably able to achieve that with a consistent level of risk.

Year to year it might perform at (say) between 7% and 11% but it is unlikely to go higher then that if the risk stays constant.

If you capitalise interest you will start pushing the boundaries of the performance of the strategy and after a few years I would suggest you would be in a loss making position even though the fund may continue to perform as expected.

Capitalising interest is at best a (very) short term strategy in my opinion and I would discourage my clients from doing so on our funds.

Unless of course you reinvest your income into new units, in which case your return will effectively be the same as if it was a growth fund (of the same % growth/income) that didnt distribute anything

 

[JIT]

Unless of course you reinvest your income into new units, in which case your return will effectively be the same as if it was a growth fund (of the same % growth/income) that didnt distribute anything

Yes, but the point of investing in an income fund is to give you income to live off!

GSJ

 

[coopranos]

Yes, but the point of investing in an income fund is to give you income to live off!

GSJ

Yeah that is certainly one reason you might invest in an income, but certainly not the only reason.
Perhaps you have a high amount of non-deductible debt, and are interested in "recycling" that debt, this can be done with an income fund, but not with a growth type fund that doesnt distributes (or distributes very little in which case it is ineffective).
Perhaps your tax planning suggests that you can handle more income tax effectively, so instead of having an ever increasing capital gain (and thus larger CGT bill on sale) with a growth fund, you want to utilise your income to its fullest now (by paying the tax now), and when you sell down the track you will have almost no CGT bill.
Perhaps you are in a situation where you only would like to take a certain % of income from the distribution and reinvest the balance, this might be a bit more flexible with an income fund rather than a growth fund where you would have to sell units to accomplish the same thing.
Perhaps you have locked in your interest rate, and you are happy that the past performance of a fund gives a good chance of the fund giving good income in the future over and above the interest rate.
Perhaps there is an emotional reason you feel more comfortable with income funds (or a particular income fund), and would prefer to invest your money there than in other funds that leave your profit on the table.

You cant just give a "one size fits all" answer with these things, there are lots of different avenues you have to investigate. Some of the suggestions above may even make your total net return after tax better than you get on a comparitive growth fund (eg debt recycling).