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Income Fund Query

Discussion in 'Managed Funds & Index Funds' started by AndrewG, 2nd Mar, 2007.

  1. AndrewG

    AndrewG Well-Known Member

    Joined:
    3rd Feb, 2007
    Posts:
    61
    Location:
    Adelaide, SA
    Hi all,

    I will just key in a few stats for two MF (info from DirectAccess.com) I am looking to invest about $25-$30K in (yes, just a small start up amount at this stage).

    Time........Income %.....Growth %....Total %
    CFS Imputation Fund
    1YR..........22.83..........-4.75..........18.08
    2YR..........19.49..........0.9.............20.39
    3YR..........16.11..........7.34...........23.45

    BT Imputation Fund
    1 YR..........3.54............22.77.........26.31
    2 YR.........13.55...........13.26.........26.81
    3 YR.........14.8.............14.19.........28.99

    The CFS fund has a slightly higher volatility rating, but is marginal. The CFS fund has a 2-star rating, the BT has a 5-star Morningstar rating (does this weigh a lot?).

    My goal is to have 2 different managed funds, across property and shares. The above represents my "aussie shares" sector. For the income, I have looked at the above two funds (tax effective income) and would like some opinion on the income vs. growth aspect. CFS has very good income at the expense of growth, and vice versa. Yet in the end, they both produce good results and the BT seems to outperform overall.

    (Just as an aside, am I correct in saying that if you were to auto reinvest the entire distribution, BT would make a better product due to its higher return overall?)

    Anyway, CFS has much higher distribution amount, so does this mean I would be paying less tax overall as the majority of return is via distributions? And therefore if I went BT, to get additional income I would have to withdraw some amounts from time to time, so would I therefore pay more tax doing it this way? Just trying to get a bit more info on the way the income/growth aspects work come tax time etc.

    Finance wise, I would start off with an amount of $10K from my savings account, and get a margin loan of $15-20K. (Max margin loan is 75% for both, so I'm well under). I would take the distributions and split between paying down margin loan, and supporting my real estate shortfall.

    Leter on as I gain more confidence/experience/exposure I can add quite significantly more to these funds, but baby steps for now.

    Thanks for any assistance,
    Andrew.
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,623
    Location:
    Sydney, Australia
    I personally don't pay much attention to ratings - you have to pay to get them, so just because you haven't got a rating, doesn't mean your fund is no good. The criteria used to assess the rating doesn't necessarily take into account the unique methodology of a fund which may make it more suitable for your purposes - it's a one-size-fits-all measure.

    You pay tax on distributions in the year they were earned (regardless of whether you choose to have distributions reinvested or not - you still pay tax).

    You don't pay tax on capital gains until those gains are realised - and if you have held for more than 12 months, you get the 50% CGT discount.

    For these reasons - growth funds may be more tax effective over the longer term than income funds. There are exceptions to this rule - but that depends very much on your personal circumstances and investment structure.

    The main benefit with income funds is that once you have your distribution - that's cash-in-hand ... a drop in the market can't take that away from you (unless you choose to put it back at risk by re-investing it ... but that's your choice). If you are relying on income for other expenses, this may make such a fund more suitable for you, despite the tax implications.

    Tax is not the critical component - your overall returns are, based on your risk profile and personal situation ... tax is just another variable.
     
    Last edited: 2nd Mar, 2007
  3. Simon

    Simon Well-Known Member

    Joined:
    17th Sep, 2005
    Posts:
    520
    Location:
    Newcastle
    That's what I was thinking. If you are reinvesting then a growth fund might be what you are after.