Ask The Fool Equity funds Q: What are "fixed-income" and "equity-income" mutual funds? A: Fixed-income funds focus on bonds. Bonds are sometimes referred...
Ask The Fool
Q: What are “fixed-income” and “equity-income” mutual funds?
A: Fixed-income funds focus on bonds. Bonds are sometimes referred to as “fixed-income” investments because most bonds have a fixed interest rate, letting you know exactly what kind of income they will offer you.
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Equity-income funds, meanwhile, focus on stocks that pay relatively high dividends, aiming to provide investors with regular streams of income.
This is different from growth or value funds, which invest in companies whose stock is expected to advance, regardless of whether the companies even pay a dividend.
Many fast-growing companies don’t pay any dividends, as they prefer to funnel most of their income into fueling their growth.
Mutual funds that focus on income are generally best suited to those who need regular distributions of cash, such as people in retirement. However, even retirees might remain invested in some other funds or stocks, simply selling off a portion each year to generate the income they need.
Warren Buffett, chairman of Berkshire Hathaway, is one of the world’s greatest investors. He and his partner, Charlie Munger, shared thoughts on life, money and success and their recent shareholder meeting (partially paraphrased):
• On overpaid CEOs: There is only a handful of people who can do much about it. If big, institutional shareholders withheld votes, that might be one way.
• Advice for students: Imagine you’re 16 and can choose any car. But it will be your only car for the rest of your life. … Of course, you’ll read the manual five times and will treat it very well, keeping it garaged, changing the oil frequently, washing it, etc. You get only one body and one mind. Better treat them the same way. Any investment in bodies and minds is good. … It pays off in an extraordinary way.
• On temperament: Stay calm when others in the market get excited. It’s all just business. Don’t get excited about stock splits. It’s important to have a bedrock-investment philosophy. … It’s important to have the right “calm” temperament and the ability to think for yourself. It doesn’t make any difference what anyone else thinks about a stock.
• Advice for young, nonprofessional investors: Put your long-term savings in a low-cost index fund, such as from Vanguard. … That will probably outperform bonds over a long period of time, so invest, then forget it and go back to work. … If you don’t have prospects as a professional investor, use an index fund. No one will give you that advice, since it doesn’t make anyone money. You’ll get a good return.
Read Buffett’s letters to shareholders at www.berkshirehathaway.com.
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