What is a Monthly Income Fund ISA?
A monthly income fund ISA is a Stocks and Shares ISA that invests in income funds.
What is an income fund?
An income fund is usually a managed fund (Unit Trust or OEIC) that invests in companies within a specific sector.
Fund managers pool together their investors’ money and buy shares of companies they think will perform well.
With income funds specifically, they target companies that produce regular dividends for their investors such as those with strong and reliable cash flows.
The fund managers then pay out a yield of income to investors over the course of each year. This can be on a monthly basis or less frequently.
Income funds can also appreciate in value over the long term if the companies they invest in grow. However, they can also fall in value too so it's important to be aware of the risks.
How does a Monthly Income Fund ISA work?
Usually, you withdraw the regular income from your Stocks and Shares ISA to use as a source of personal income.
However, you can also elect for it to be reinvested automatically into your ISA account for a long-term savings approach to build wealth.
ISAs are tax-free savings accounts, and this means that all the dividends paid out from your income funds are 100% free of tax.
And this also applies to capital gains tax, too, meaning that the growth of your income funds’ value over time will not be subject to tax when you sell it as it would outside of an ISA.
How do you choose a monthly income fund ISA portfolio?
There are two main investment styles you can choose from when selecting your monthly income fund ISA:
- Ready-made income portfolio
- Pick income funds yourself
The ready-made option:
A ready-made income ISA portfolio will be put together by the investment professionals at your chosen Stocks and Shares ISA provider.
Ready-made portfolios are usually categorised by growth or income as their investment strategy, so you’ll want to pick an income option to get exposure to income funds.
You’ll then need to pick a risk level for your portfolio, usually ranging from more adventurous, higher risk portfolios to lower risk, defensive portfolios.
The risk level is determined by the underlying investments and how likely they are to fluctuate dramatically in value. Shares in smaller companies are usually more volatile and higher risk, for example, but may have greater growth potential.
Self-select income fund ISA:
If you’re picking your income funds yourself, then you’ll need to invest in a self-select or DIY Stocks and Shares ISA platform.
With a self-select ISA, you’ll open your ISA, add money, and then purchase income funds within your account.
How do I choose an income fund?
Here are the essentials to remember when finding and comparing income funds to invest in:
- Income funds usually have “income” in the fund name (not to be confused with income or accumulation units - more on this below)
- Income funds will pay a monthly, quarterly or biannual dividend yield to your ISA cash account which can then be withdrawn or reinvested
- Make sure to read the Key Investor Information Documents for each fund to understand what they invest in, what risk level they are and how they operate
- Each income fund has an annual yield they aim to meet, calculated and displayed as a percentage
- You can usually invest in as many income funds as you like, which is a good way to spread your risk and diversify your savings
What are income or accumulation units?
All managed funds (OEICs and Unit Trusts) are available in either income or accumulation units, and the unit type is displayed at the end of the fund name.
Income units simply mean that any dividend yield produced by the fund is paid out to investors.
Accumulation units mean that all dividend yield is automatically reinvested into the fund and is reflected in the value of the units.
Income and accumulation units of the same fund are identical and have exactly the same holdings. The unit type only affects what is done with the dividends that the fund produces.
If you want to receive the income from your ISA funds into your bank account, you’ll need to choose the income units for the fund you want.
You might also need to make sure your Stocks and Shares ISA account is set up to automatically pay any dividends you receive to your bank account, instead of reinvesting them or leaving them as idle cash in your account.
How to invest in a Monthly Income Fund ISA
When you’ve chosen your monthly income fund ISA, you’ll be able to open your account online in just a few minutes.
You'll need a debit card to add money to your account, and some basic personal information including your National Insurance number.
You must also be over the age of 18 to open a Stocks and Shares ISA.
