The most obvious option to generate a monthly income is to buy funds that do just that. Some funds explicitly set out to provide investors with a monthly income, while others – such as many property funds – pay out dividends monthly, too.
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Darius McDermott of fund shop Chelsea Financial Services said that most monthly income funds attempt to offer 11 monthly payments of a similar amount and a 12th that varies. The exact level of income will depend on the fund’s performance.
“Many will try to make the 12th month a bigger payment if they can, but it will depend on market conditions,” he said.
However, in order to deliver this monthly income, these funds will be restricted in how they can invest.
James Baxter of adviser Tideway said there is often a mismatch between the regular payouts from monthly income funds and the income the funds actually receive from the assets they are invested in.
He said: “It puts pressure on managers to invest in assets that distribute income at set points of the year, rather than those that are most attractive from a growth or income perspective.”
He selected Artemis Monthly Distribution as one of the better monthly income funds available. It invests in shares and bonds, and the manager focuses on sustainable yield, said Mr Baxter.
The fund charges 0.89pc annually, and currently yields around 3.7pc. Since launching in May 2012, a £1,000 investment would have generated £244 in income, according to data service FE, and the fund’s total return over that period – of income and capital growth combined – was 92pc.
Mr Baxter said investors need to choose a fund based on what it is actually invested in, rather than just looking at the yield figure, as “it can be very dangerous to invest blindly on past yield alone”.
Invesco Perpetual Monthly Income Plus is another favourite of experts and advisers – and is included in our Telegraph 25 list of favourite funds.
The fund yields 5pc and is largely invested in bonds with a small holding in shares. It charges 0.72pc a year. A £1,000 investment five years ago would have generated £260 in income, while the fund’s total return over that period was 41pc.