10 funds to generate a £10,000 income in 2025

A year ago, I selected 12 funds with the aim of achieving £10,000 of annual income in 2024.

Collectively the hypothetical portfolio yielded 4.55%, meaning that a sum of £230,000 was required to attempt to hit the target.

While income is the priority, I’m also keen to try and strike the right balance from a total return perspective.

The income target was achieved, with £10,152 of income generated. Overall, when combining both capital and income returns, the portfolio increased to £252,924, which works out as a percentage total return (with dividend reinvested) of 10%.

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Before revealing the line-up for the £10,000 income challenge in 2025, let’s look at how last year’s constituents fared.

How the 2024 portfolio fared

Seven of the 12 funds delivered total returns above 10% in 2024.

The mixed-asset fund, Artemis Monthly Distribution, delivered the highest return of 15.7%. This fund typically holds 60% in shares and 40% in bonds. Throughout 2024, its equity exposure had the greatest influence in terms of overall returns. However, various bond holdings also benefited from interest-rate cuts, which cause bond prices to rise and yields to fall.

Artemis Income generated a 15.1% return. This fund aims to provide a steady and growing income along with capital growth. Among the biggest contributors to returns in 2024 were 3i Group (LSE:III) and Wolters Kluwer (EURONEXT:WKL), as well as more “value-oriented” names such as the UK domestic banks and Imperial Brands (LSE:IMB).  

Guinness Asian Equity Income was third in terms of the highest returns, up 14.9%. Performance was led by banks, insurers and technology companies, specifically those related to the artificial intelligence (AI) theme.

The other funds in the double-digit returns’ club were Fidelity Global Dividend (up 13.5%); Vanguard FTSE UK Equity Income Index (up 12.6%); Man Income (up 11.8%) and Vanguard FTSE All World High Dividend Yield ETF (up 11.4%).

At the other end of the table, Jupiter Strategic Bond posted a small loss (-0.2%). In a recent video interview with interactive investor, co-manager Harry Richards said its “long duration positioning” to government bonds – those with long lifespans – had been “a drag on performance”.

The two other holdings involving bonds had a solid year, with total return gains of 5.3% and 9.7% respectively for Royal London Short Term Money Market and Royal London Global Bond Opportunities.

Finally, towards the bottom of the table, with gains of 3.8% each, were Janus Henderson UK Responsible Income and FTF ClearBridge Global Infrastructure Income.

Source: Morningstar. Total return figures are one year to 31 December 2024. 12-month yield as at 31 December, used to estimate income from initial value. Past performance is not a guide to future performance.

Purpose of the portfolio

The hypothetical portfolio aims to show DIY investors how they can build their own diversified income portfolios alongside wider research.

The funds are chosen on the basis that over the medium to long term they would be expected to grow both capital and income. However, there are no guarantees these aims will be achieved.

Moreover, it’s important to be mindful of the fact that overall total returns (capital and income combined) can decline, especially in the short term.

Bear in mind that funds must distribute all the income generated each year by the fund. Therefore, when income dries up, as it did in 2020 when the Covid-19 pandemic emerged, a dividend cut is pretty much inevitable.

Investment trusts, on the other hand, can hold back up to 15% of dividends received each year, which means they can build up a reserve to bolster payouts in leaner years.

The line-up for the 2025 portfolio

As I’ve picked each fund for the medium to long term, I’m inclined to avoid making changes each year. However, there are certain things I consider, for example, fund manager changes, short- and long-term performance, and whether I can simplify the portfolio.

For 2025, I’ve decided to reduce the number of holdings from 12 to 10.

The two that stood out to me to eliminate were Janus Henderson UK Responsible Income and FTF ClearBridge Global Infrastructure Income.

Janus Henderson UK Responsible Income is one of interactive investor’s ACE 40 funds, which is a filtered selection from the sustainable investment universe. It’s been managed by Andrew Jones since the start of 2012. Returns have been strong during his tenure (up 206% vs 151% for the sector average),but over one, three and five years, it has underperformed the average UK equity income fund.

In a recent commentary piece issued by the fund, it was noted that the expectation is for domestic stocks to perform better in 2025. This, of course, may well play out. But there’s also the risk of economic growth being lacklustre, with the prospect of inflation surprising on the upside.

The fund, which has a blend of internationally exposed companies and domestic stocks, could profit from a recovery in domestic stocks in 2025, but, for this portfolio, I would sooner focus on the two other active funds I have higher conviction in; Artemis Income and Man Income.  

The other change I’ve made is removing FTF ClearBridge Global Infrastructure Income. It made a small loss of -2.6% in 2023, and a small gain of 3.8% in 2024.

The exposure to infrastructure provides additional diversification in the portfolio, which has been one of the reasons for choosing this fund, which is one of interactive investor’s Super 60 investment ideas. On the whole, infrastructure has predictable cash flows (many of which are linked to inflation), giving the considerable defensive qualities of the asset class. However, listed infrastructure is an equity. Therefore, it’s correlated to the ups and downs of stock markets.

The main reason for removing the fund, though, is down to the eye-catching yields on bonds and the prospective price returns for bonds (when interest rates are cut). I would sooner seek out greater bond exposure, particularly given that yields of around 4.5% to 5% can be obtained on the lowest-risk areas of the bond market, such as gilts and money market funds. When interest rates were low, which made bonds less appealing, there was more incentive to invest in alternative income assets, such as infrastructure.

Portfolio weightings

The 2025 portfolio requires £235,000 for the £10,000 income challenge (a portfolio yield of 4.26%). All yield figures were sourced in late January, but bear in mind that yield figures are not static.

For 2025, I’ve increased the bond exposure from around 30% to close to 40%. As my colleague Sam Benstead says, now is a great time to consider bonds, due to the high level of income on offer and the prospect of interest rate cuts, which will boost bond prices. Even if there are fewer rate cuts than expected, the income level that bonds are generating acts as a buffer and can still generate a positive return for investors.

The bond exposure is derived from Artemis Monthly Distribution (which owns 60% in shares and 40% in bonds), Jupiter Strategic Bond, Royal London Global Bond Opportunities and Royal London Short Term Money Market.

While Jupiter Strategic Bond made a small loss in 2024, I like its flexible approach and ability to invest anywhere across the bond market. In the event of interest rate cuts, its long-duration bond positions (which hurt performance in 2024) should pay off. Its fund managers think the market is under-pricing the amount of rate cuts in 2025 and that inflation has become less of a problem. Time will tell.

Royal London Global Bond Opportunities invests in under-researched parts of the market, including unrated bonds. It’s been a solid performer across multiple time periods.

Royal London Short Term Money Market owns a diversified basket of safe bonds that are due to mature soon, normally within just a couple of months, meaning that investors can earn an income on their cash with minimal risk. It has an excellent long-term track record, low drawdowns and is competitively priced with a yearly ongoing charge of 0.10%.

For equities, some exposure comes through Artemis Monthly Distribution, with the rest split 25% each between UK equity income and global/overseas income funds.

The UK choices are Artemis Income, Vanguard FTSE UK Equity Income and Man Income.

Artemis Income is not wedded to one investment style, such as value or growth. It has around 50 holdings. In a video interview with interactive investor, co-manager Nick Shenton said the focus was on “free cash flow first, dividends second”.

Vanguard FTSE UK Equity Income, a tracker fund, physically invests in the constituents of the FTSE UK Equity Income index, which consists of shares “that are expected to pay dividends that are generally higher than average”. Therefore, performance and income generation is heavily influenced by the largest companies in the FTSE 100 index that pay high income.

Man GLG Income undertakes a value-driven approach to provide a yield well in excess of the FTSE-All Share. Henry Dixon has managed the fund since inception in November 2013, when he joined Man GLG.

For global/overseas income, I’ve stuck to the same three funds as last year: Fidelity Global Dividend, Vanguard FTSE All World High Dividend Yield ETF, and Guinness Asian Equity Income.

Fidelity Global Dividend has a low yield of 2.4%. However, its role in the portfolio is to provide a greater balance of returns, as the fund aims to generate both income and growth, while limiting downside risks. Fund manager Daniel Roberts has been at the helm since launch in January 2012.

Vanguard FTSE All World High Dividend Yield ETF, a tracker fund, follows the ups and downs of the FTSE All-World High Yield Index, which comprises more than 2,000 large and mid-cap stocks with higher-than-average dividend yields. It has exposure to stocks listed in developed and emerging markets.

Finally, there’s Guinness Asian Equity Income. This fund’s equally weighted approach of 36 stocks helps to reduce stock-specific risk. Edmund Harriss, who oversees Guinness Asian Equity Income, says the focus is on “companies [with] sustainable competitive advantages, that are making things or providing services that people want to buy, and doing it better than their peers”. Harriss has managed the fund since inception in 2006.