The recent suspension of Neil Woodford’s Equity Income Fund highlights the risks that are faced by investors in open-ended investment companies. With the FTSE 100 offering a high yield at the present time, as well as no management fees and a high level of liquidity, buying large-cap dividend stocks rather than income funds could be a sound move over the long run.
Open-ended funds have always had an element of liquidity risk. That is, when investors demand their money back, there is a risk of the funds not being immediately available. This has usually posed a threat to property funds, which by their very nature invest in illiquid assets. However, as has been shown by the suspension of the Woodford Equity Income Fund, it can occur where any fund has relatively illiquid investments.
By contrast, liquidity is unlikely to be a major risk facing investors who own a variety of FTSE 100 shares. Should they wish to sell, there are likely to be buyers even during the most challenging of market downturns.
While a number of equity income funds offer impressive yields, so too does the FTSE 100. In fact, it has a dividend yield of 4.6% at the present time. This is relatively high in comparison to its historic range, and suggests that it offers good value for money.
Furthermore, over a quarter of the index’s constituents have dividend yields of more than 5% at the time of writing. Therefore, it may be possible to build a portfolio of income shares that offer diversity, while obtaining an average portfolio yield that is in excess of 5%.
Although the process of building a portfolio of shares may be more time consuming than simply buying units in a fund, the additional returns that may be available could make it a worthwhile move for many investors. That’s especially the case over the long run, where even a relatively modest difference in annual total returns can lead to a significantly larger portfolio valuation when the impact of compounding is factored in.
The increasing popularity of online share-dealing means that the cost of buying and selling shares has fallen significantly in recent years. Certainly, fees in the fund management industry have also become more competitive. However, building a portfolio of stocks may be more cost-effective for many investors when compared to buying units in a fund that is actively managed.
For example, it is possible to purchase shares through regular investment services. This is where client orders are aggregated to reduce commission to as little as £1.50 per purchase. This could mean that a portfolio of 25 shares, for example, is built at a cost of just £37.50 plus stamp duty. This may improve returns yet further when compared to active funds that charge a percentage fee each year.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.