There are two types of investments – income-focused and growth-focused. Assets included in both types of investments are the same, such as shares and funds, but the dividends and income you earn are reinvested when you choose a growth-focused investment plan. Before dipping your toe into the water, you should know the investment world inside out, so you do not struggle to achieve your investment goals.

However, when you are not so experienced, it is suggested that your strategy be income-centric. It includes investing in shares, bonds, and mutual funds of fast-growing companies that keep paying you dividends and interest at regular intervals. However, it is enjoined that you create a diversified investment portfolio, so it is essential to invest in less risky assets, such as a fixed deposit.

Benefits of income-focused investing

Here are the benefits of income-centric investing:

ü  A steady cash flow

One of the greatest advantages of income investing is that it ensures a steady cash flow. From dividends to interest payments, all will be paid out to you in regular intervals. It means you will keep receiving cash even in tough financial conditions. This kind of investment is particularly reliable for retirees.

This is the time when you live off your pension. It cannot be enough to get by. If you invest in income-centric assets, you will be able to have cash coming in. This will make it much easier for you to pay all expenses. At the time of retirement, you do not have to follow a growth-focused investment plan.

This strategy can also help you when you are struggling financially. For instance, if you have lost your job, you can rely on income from shares, bonds, and mutual funds in addition to unemployment benefits.

ü  Lower volatility

All income-generating assets, from stocks to bonds, are less subject to price fluctuations than growth-oriented investments. They are not considered highly risky as long as you are investing in profit-generating companies. Since price fluctuation is not as dramatic, you will not lose a lot of money if the market does not work as per your expectations.

ü  Capital preservation

There is no doubt that stocks are highly volatile. Depending on the company whose shares you have bought, prices can fluctuate dramatically, but those fluctuations do not influence dividends.

Therefore, stocks are protected against market risk. Similarly, when you invest in bonds and mutual funds, the aim is to protect your investment from loss rather than focus on growth. This process is called capital preservation.

However, it is worth bearing in mind that low-risk assets offer modest returns. This might not be suitable for all types of investors, but it minimises volatility and avoids significant loss.

ü  The potential of compound interest

When you earn dividends and interest, you have an option to reinvest them. This helps you earn compound interest. This leads to long-term wealth accumulation.

ü  It protects against inflation

Inflation is one of the biggest reasons why people struggle with savings. Continuously soaring prices reduce the buying power of people. Income does not rise proportionately, and hence people tend to borrow money to pay for their expenses. Short-term loans charge very high interest rates, and they are most likely difficult to repay. If you fall behind on payments, your credit score will be completely ruined.

While there are some lenders providing extremely bad credit loans in the UK with guaranteed approval, they can be difficult to secure. Most of the time, lenders restrict the lending amount.

You can avoid falling into an abyss of debt if you invest in assets. As you will be getting higher interest than savings accounts, you will be able to protect your money against the impact of inflation.

Drawbacks of an income-oriented investment plan

Here are the disadvantages of an income-focused investing plan:

ü  Limited capital appreciation

One of the biggest drawbacks of this kind of investment strategy is that capital appreciation is limited. Overall returns, as compared to growth-oriented investment strategies, are much lower. It solely focuses on income-generating assets, avoiding capital appreciation opportunities.

ü  Income fluctuation risk

While dividends are not significantly affected by the fluctuation in prices of stocks, there is no guarantee that you will receive dividends. Companies have the right to cut or suspend dividends. At the time of investing in money, you should bear this fact in mind too.

ü  Capital loss

Do not assume that fixed-income assets are not sensitive to market risks at all. While bonds are less volatile than stocks, they are subject to capital loss. When interest rates rise, the value of bonds falls. This leads to capital loss if you sell them before maturity.

ü  Tax payments

Whether you invest in a short-term or long-term investment asset, you are supposed to pay taxes on capital gain. This refers to the amount that you earn in the form of dividends and interest. Bear in mind that the income you earn from investments is taxable as it is considered capital gain. It is crucial to plan taxes before investing money because a significant portion of capital gain goes to income tax.

ü  Too good to be true

There are some assets that seem to provide unusually high dividends and interest. Remember that this could be a trap to lure you to invest money in certain stocks and bonds. This could be a sign that these companies are suffering from poor finances, and once money comes in, they will cut or suspend dividends.

Things you should keep in mind while investing money

Here is what you should keep in mind while investing money:

ü  No investment is free from risks. It is vital that you carefully research your options.

ü  Creating a diversified portfolio will cushion the blow of a market crisis.

ü  You should analyse your risk-tolerance capacity before investing money. This reflects how much money you will afford to lose in case of a market crash. You will need to consult an investment expert.

ü  Make sure that you choose an expert who has years of experience under their belt. However, it is vital that you also use your knowledge while choosing investment assets.

When investing money, make sure that you have a sufficient emergency cushion. This is necessary to meet unexpected expenses. It is not recommended that you invest money without having a sufficient emergency corpus, which should be at least three months’ worth of living costs.

You should be free from all kinds of debts. Do not invest money if you have some outstanding debts. They should be your priority. If you are struggling with multiple debts, you should consider taking out debt consolidation loans for bad credit in the UK with no guarantor. Once you have paid off all debts, you should start investing money.

The final word

An outcome-focused investing plan helps you generate income. This is especially suitable for beginners and retirees. However, this includes low-profit assets. When you create an investing strategy, you should also try to focus on a growth-oriented plan.

Talk to an investment expert who would help you choose the best investing strategy for you, tailored to your risk-tolerance capacity and investing goals.