Your first step should be to accurately gauge your goals for investing. Next, you will want to determine how comfortable you are with risking your money. If you are comfortable with higher risks, you have the opportunity for larger returns. Conversely, the lower risk funds typically have lower returns. The next step should be to consult a funds rating service and select the income trust funds you are interested in.
Income trusts are entities that hold income-producing assets. Shares are made available in much the same way that stock in a corporation is made available to investors. The trust uses the assets to generate income which is then distributed as a dividend to the shareholders. The most common example is a real estate investment trust (REIT). REITs hold rental property or buy and sell real estate speculatively to generate income.
A mutual fund is an investment scheme that uses capital from multiple investors to purchase multiple types of stocks, bonds or other instruments for investment. Income trust funds are mutual funds that invest primarily in income trusts. These trusts have shares that are traded just like stocks. The income trusts pay dividends to the funds which increase the value of the income trust funds. Unlike holding the trusts directly, the dividends will only provide income if you sell off the funds’ shares.
Income trust funds may also invest in other instruments as part of a portfolio diversification plan. The fund you choose will summarize its investment goals and philosophy in its prospectus. If the plan’s objectives and strategies match your own, then it may be a good income investment vehicle for you. The historical performance of the fund demonstrates how profitable the fund has been in the past.
Even though past performance doesn’t guarantee future results, if the same management is present, you can have some faith in the continued profitability of the fund. One advantage of a fund is that it is an easy and inexpensive way to diversify. Like conventional stock funds or bond funds, an income trust fund’s larger amount of capital allows it to purchase significant amounts of various trusts. This will allow continued profitability should one or more of the holdings lose value.
Your research may turn up entities known as a Canadian income trusts. These income trusts function similarly to REITs, but are more diverse in the type of income-producing assets held. The Canadian tax code provides preferential tax treatment for a regular corporation if it is organized as an income trust. Remember to check with your tax advisor or the IRS on how to deal with the tax situations arising from capital gains or income from sources outside the US.