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Thursday 2 March 2017

Understanding Distribution of Income


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As investors it is important that we are aware of the meaning of distribution of income in our own investment.


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Equity Funds

The realized income comprises capital gains and dividend income. Capital gains are generated when the fund sells its investments that have appreciated in value while dividend income is earned from the fund's holdings of companies' shares.

                                                        DEPENDS:-

  • market uptrend      /       market downtrend     
  • stronger corporate earnings       /    weaker corporate earnings
  • higher capital gains & dividends       /     lower capital gains & dividends
  • higher distribution of income     /   lower distribution of income

When the market is in a favorable market condition the capital gains will increase and when the market is in a challenging market conditions the dividend income will decline. Therefore , there is a positive relationship between the market conditions with capital gains and dividend income.



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Fixed Income / Bonds

Income distribution derived from :-

  1. coupon income from bonds
  2. capital gains from selling bonds
  3. interest income from deposits
Generally , fixed income / bonds funds pays distributions to unit holders on a fixed schedule ( semi annually / annually) due to the bond issuers are usually government entities and corporations that are obligated to pay interest / coupons at a fixed intervals. Hence, the risk are lower as compared to equities.

However , investors should also know that bond prices and interest movements are in a negative relationship which means , if at any point of time the interest increases, the bond price will fall which also means that there's an impact to the capital gains generated. Conversely , when interest rates decline , bond prices appreciates and the funds are more able to generate higher quantum of capital gains.

Hence in both equities and bonds funds , investors are advised to stay in the medium to long term in order to ride out the short term volatility in both funds as well as taking the advance of the compounding interest.  Click here for compounding interest understanding

I hope that now you have a better understanding on the distributions and its always good to invest based on your financial goals and for a better portfolio management to have both funds in a certain percentage  range from 70:30 , 60:40 , 50:50 based on your own risk profile classifications.

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