Income Opportunity Funds
Income opportunity fund generally represent a portfolio of securities selected for their abilities to generate income, as opposed to capital appreciation. Income opportunity fund focuses on specific security type or mix of securities types, including dividend-paying equity securities, preferred shares, investment grade bonds, government, municipal and corporate debt obligations, money market instruments, etc.
Securities are usually chosen based on the issuers credit rating and/or the strength of the company's cash flows. Generally, bonds included in the portfolios of income opportunities funds are of investment grade, whereas other securities are of sufficient credit quality to assure a preservation of capital.
Income opportunity fund typically follows a "focused" investment approach, when it put emphasis on a suitably diversified portfolio of different businesses that meet the required profile.
The portfolio manager might also decide to use warrants and derivatives, such as options, forwards contracts, futures contracts and swaps, to hedge against losses from changes in prices of income opportunity fund's investments and from exposures to foreign currencies. Income opportunity fund might also engage in short selling.
Share price of income opportunities fund tends not to be fixed. They will fall when interest rates are rising and increase when interest rates are falling.
The most popular income opportunity funds are likely to have a high-risk profile and focus mainly on investment opportunities in high-yield bond funds and bank loan funds.
The former type of income opportunity fund invests primarily in corporate "junk" bonds and will offer an investment in domestic or/and global corporate debt, global high yield, emerging markets debt and hybrid securities; the latter, in floating-rate loans issued by banks or other financial institutions.
In general, exposure of income opportunities fund's portfolio is in floating rate securities or converted to floating rate exposures through the use of derivatives such as futures and swaps.
The investment opportunities can be found in diverse industries, such as energy, financial services, food and beverage, healthcare and hospitals, insurance, software, telecommunications and utilities. The income opportunity fund can concentrate on its investments in some special industries market or a mixture of those, for example, utility industry (50%) and financial services sector (remaining 50%).
The investment objective of an income opportunity fund is high current income for holders of its common stock consistent with preservation of capital. What makes the income opportunity fund unusual, however, is the use of strategies which are expected to result in the income opportunity fund's income increasing as long-term interest rates rise significantly, while being relatively resistant to declines in long-term interest rates.
Who should invest in income opportunity fund?
The objective of investment in opportunity fund is always the same: enhancing returns by smartly choosing a type of opportunities fund that has a potential to deliver returns in particular market conditions. The income opportunity fund may benefit investors who are seeking monthly stream of income, relatively low volatility and opportunistic allocation.
The income opportunity fund is suitable for investors with a moderate tolerance for risk.