Income fund over GIC at 5% ? | GIC discussions | Discussion forum

Don't fall for that "monthly income fund" garbage. My previous comment about them still stands.

6% is likely what the fund pays out arbitrarily and not what the fund earns. Consequently, you'll get 6% paid out per year. But, you won't necessarily get your $800,000 back when you try to cash out later. That's because some of that 6% payout is from the $800,000 principal.

It is the same sleight of hand used by insurance agents to sell prescribed annuities.

Norman1 said
Don't fall for that "monthly income fund" garbage. My previous comment about them still stands.

6% is likely what the fund pays out arbitrarily and not what the fund earns. Consequently, you'll get 6% paid out per year. But, you won't necessarily get your $800,000 back when you try to cash out later. That's because some of that 6% payout is from the $800,000 principal.
  

The OP has not defined what is meant by the 'monthly income fund'. Ordinary 60/40 balanced funds are also called 'monthly income funds' but have no rigid distribution amounts, i.e. they simply pass through income from underlying holdings each month. I'd like to know the name (fund code) of the fund first before assuming they are the 'managed payout' type.

CIB512 is a classic 60/40 balanced mutual fund paying out distributions monthly. It looks to be a very average fund with a MER of 1.45% with an average 3 star rating from Morningstar but under performs its peers https://www.morningstar.ca/ca/report/fund/performance.aspx?t=0P0000707U Click the various tabs in the link for information. See also the fund facts from CIBC itself https://www.cibcassetmanagement.com/email/fund-facts/pdf/cib_512_en.pdf

The monthly distributions from this fund will be a variety of income types, from eligible dividends to cap gains, to return of capital, to Other income (interest) which will be shown on the T3 tax slip each March (for non-registered accounts).

However, don't be smitten by yield percentage as per my prior post. Current yield percentage is only as high as it is because of the significant decline in market price this past several months/year.

What you really need to do for a comparison with GIC interest is to dig around and find the distribution history for the past 5 years or so to see how the monthly distributions have varied over that period of time. It is the actual value of the monthly distributions that matter, and end up in your bank account, not the yield percentage. I googled a bit for that info but didn't find it. However, it is public data and anyone buying a monthly income fund of this kind (for income) should be profiling at least 5 years (or more) of distribution data to see if they can accept the variability in distribution income.

Mark M said
Good morning Altared I just edited the CIBC fund I originally posted.
CIBC PPS Monthly Income Balanced is the correct fund.
Sorry about that.  

I don't have time right now to comment but my first reaction is rather negative. The word Managed and PPS is a red flag, as is the performance per the Morningstar link, as is the MER. I wouldn't touch it on first blush.

Funds containing stocks and bonds (which you are considering) do not guarantee anything; you take on market risk in exchange for a chance to get better returns. Historically, for a balanced portfolio to lose money over 5 years is almost unheard of but future might be different.

Consider putting your eggs in more than 1 basket, aka buying a GIC as well as stocks and bonds.

Something like VRIF could be a better product than a mutual fund for the investment portion. Look it up.

There are a couple of issues here. The OP has not said anything about where he keeps his investment accounts. If it is a CIBC bank branch, then all he is likely to get is CIBC mutual fund products. That may as adventuresome as he is willing to get. Until he advises otherwise, that has been my assumption.

However, if that is incorrect and the OP has a DIY discount brokerage account, then there are far better alternatives to what he is proposing such as VRIF ETF with a 4% 'managed' payout with a much lower MER (~30bp I think). We don't know what we don't know at this point.

I also made the assumption the OP is strictly looking for the monthly income and has no plans to touch the invested capital (whether a GIC or a mutual fund). In that case, it does not matter much what the mutual fund does on a day/weekly/monthly/annual basis with respect to market price volatility, or how its market value varies. What matters more is the history of distributions over the past 5-10 years. Does the annualized distribution over time go up? When did it go down from current levels? in 2020 for example? How much? Can the OP live with annualized distribution volatility?

Right now, the distribution, expressed as a yield percentage looks not bad, but that is because market price of the fund is also down. What is the actual yield today, rather than the 4.4% TTM mentioned in the Morningstar link? At the very least, the OP needs to look at multi-year distribution history if he is specifically focused on monthly income generation.

That all said, this product has a terrible MER of 2.22% and from the Morningstar link, has grossly under performed both the 'neutral balanced category' for this fund (its competitive peers), and has grossly under performed the index for this category. Its 10 year history has mostly been 3rd quartile or 4th quartile performance. I'd run, not walk, from this product.

highlyinterested said
GIC hands down  

You don't have enough information from the OP to say that. If the principal will never be drawn down, and the OP dies with the original investment untouched, most monthly income mutual funds will generate higher distributions than a GIC and some of it, in non-registered accounts will be tax advantaged eligible dividend income and/or capital gains.

The downside as everyone knows is there are no guarantees on the originally invested capital being there should one need to tap into it in later life.

A bit off-tangent, but I think it is worthwhile to say a few things about the "managed payout" mutual funds that promise (but don't guarantee) pretty constant payouts of 5%, or 6%, or 7% on a recurring basis. We all know that kind of yield is not possible just from the investment income from the holdings within the mutual fund so it means the fund manager has to sell some holdings along the way to pay out those distributions. That means some of the investor's capital is being paid back to the investor in the form of Return of Capital (ROC). That is not a bad thing if the mutual fund's performance for the year exceeds total payout, but it does start to deplete the fund if the overall performance of the fund is less than the payout and that is a never ending spiral downward if it occurs regularly. Many of these funds should be avoided in most cases, at least for young(er) retirees.

However, there are situations where such a fund can make sense and that is where someone might be 80 or 85 years old and is really needing the income. It doesn't matter much at that point if the fund's assets are being depleted slowly over time because the investor will die first before the fund starts to implode in a significant way. Furthermore, distributions in the form of ROC are not immediately taxable and thus the investor gets more net cash flow after taxes. ROC simply reduces ACB and the tax eventually payable at the time fund units are sold (or crystallized at death) is in the form of capital gains tax. That is a win-win for the cash flow starved elderly senior.

IOW, these managed payout funds have a particular role to play for specific needs at a specific age. They are not all created equal however. Some perform better than others, some have atrocious MERs and some promise too much yield, e.g. 6%, 7%, etc. If it sounds too good to be true, it is too good to be true. A managed payout fund promising 4-5% range is a much better bet.

To be useful we would need more info on the nature of your existing income, whether it covers your basic needs, etc.

Whatever you do, make sure that your GIC is covered by CDIC (100K per GIC).

Still, based on what we know, I would be inclined to split. With GICs your main risk is inflation getting out of control but you get short term stability. Equities can handle inflation but are volatile in the short term. So, have both.

Also, whichever fund you buy, make sure its a) diversified and b) has MER of less than 1%. Might not sound like much but when your money is subjected to this charge again and again and again, it has a big impact.

Even 1% is too high in this day and age when you can get products costing less than 0.1% per annum.