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Fixed income investments serve multiple purposes. Investors who are living on their investments often look to the steady stream of potential income from bonds and bond funds to pay their expenses.
But not all investors utilize bond funds for monthly income. Most turn to bonds as a potential stabilizing component in a balanced portfolio. The regularity of bond income also makes debt instruments a less volatile asset class than stocks, and hence a great diversification tool.
The FundX Flexible Income Fund (INCMX) is intended first and foremost to be a buffering element in an investors portfolio. We believe that INCMX can potentially lower volatility when used in conjunction with one or more of the equity-based FundX Upgrader Funds.
INCMX does not distribute a monthly income stream, rather it pays out a full year’s worth of income in a single distribution at the start of each year. This may seem like an odd way to provide income to shareholders, but making a single annual distribution actually provides flexibility. Shareholders who hold INCMX in taxable accounts can opt to avoid the distribution entirely by selling shares just prior to the ex-date, then buying back shares after the distribution is made, when the net asset value (NAV) is lower.
Investors who are looking for a regular stream of income can set up an automatic withdrawal plan which periodically liquidates shares to provide the investor with income.
If you are planning on taking income from your investments, consider keeping one year’s worth of expenses in cash. Money you will need in future years could be in a bond fund portfolio like INCMX. Then, when you need cash, simply sell off shares to accommodate your withdrawals. By selling shares, you may realize long-term capital gains, which are taxed at a more favorable tax rate than ordinary dividend income.
Making Monthly Withdrawals
The chart below illustrates what an investor’s experience would have been had she taken monthly withdrawals from an investment in INCMX for the past eight and a half years (since inception).
Hypothetical Growth of $500,000 Since Inception (7/1/02)
This chart illustrates the performance of a hypothetical $500,000 investment made in INCMX on its inception date (7/1/02).
It assumes reinvestment of dividends and capital gains, but does not reflect the effect of any applicable sales charge or redemption fees.
This chart does not imply any future performance.
Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by calling 866-455- 3863. Click here for standardized performance of the INCMX Fund.
In this example we assume an investment of $500,000 made in July 2002, shortly after the fund was launched. A 4% annual withdrawal of $20,000 would have been $1,667 taken each month. That’s a total withdrawal of $170,000. Even after taking these monthly disbursements, the account would have been valued at $627,725 at the end of 2010. That’s a 25% gain on the original $500,000 investment, even after regular withdrawals of 4% per year were made.
We also calculated the impact on the portfolio of adjusting the initial 4% withdrawal for inflation. By increasing the amount each year by 3% (roughly the long-term inflation rate) the withdrawal rose from $20,000 the first year to $25,335 in the eight year, to total $192,181 taken in cash during the eight and a half year time frame of the study. The portfolio still ended with a value of $604,126, an increase corpus of 20%.
The blue line tracks the investment of $500,000 with no withdrawals taken – the account would have been worth $845,379, a return of over 69%, at the end of 2010. The green line tracks the performance of an account from which monthly withdrawals were taken. The gray line shows the account in which the withdrawals were adjusted each year for inflation.
Diversification does not assure a profit or protect against a loss in a declining market.
Any tax or legal information provided is merely a summary of our understanding and interpretation of some of the current income tax regulations and is not exhaustive. Investors must consult their tax advisor or legal counsel for advice and information concerning their particular situation. Neither the Fund nor any of its representatives may give legal or tax advice.