Q. I’m close to retirement and looking for a conservative value fund. I’m considering American Century Equity Income. What’s your opinion of this fund?
J.B., via the Internet
A. You can sleep easy with this fund.
It doesn’t take undue risk, handles bear markets better than most of its peers and has experienced management. It also has a relatively low 1 percent annual expense ratio to recommend it, along with a low correlation to the Standard & Poor’s 500.
The $1 billion American Century Equity Income Fund (TWEIX) is down 1 percent over the past 12 months and had a three-year annualized return of 9 percent. Both rank in the top one-fourth of all mid-cap value funds.
While it’s placed in the mid-cap category for the sake of comparison, the portfolio includes value stocks from firms of a variety of sizes.
“This fund has been a steady performer primarily because of its income-oriented approach that kept it afloat whenever the going gets rough,” said Christopher Davis, analyst with the Morningstar Inc. research firm. “However, there’s always potential for the fund to do less than tremendously in growth-dominated markets.”
Industrial materials and financial-services stocks each represent about one-fourth of the fund’s holdings. Other significant groups are energy, utilities and consumer groups.
This “no load” (no sales charge) fund requires a $2,500 minimum initial investment.
Q. I’m 51, semi-retired and receive a pension of $3,100 a month. I have a 30-year, $100,000 mortgage on my home at a 7 percent interest rate. If I liquidated most of my assets, which aren’t earning much, I could pay off the mortgage and invest the money I would have used for the payments. Is this wise?
M.M., via the Internet
A. Since both scenarios make sense, it depends on which choice will make you more confident about your financial situation.
You’re most likely better off keeping your assets and your mortgage where they are, said certified financial planner Harold Evensky of Evensky Brown & Katz in Coral Gables, Fla.
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“Based on your numbers, the situation is close to being a toss-up, but it’s slightly better to keep the mortgage,” Evensky said, noting that paying a mortgage provides enforced savings. “One hesitation about telling people to pay their mortgage off is the possibility of not having easy access to enough money in case of an emergency.”
Financially, if you’re in a 30 percent individual tax bracket, your mortgage is costing you just under 5 percent, Evensky estimated, and there’s a good probability you can invest and derive a better rate than that. But the catch to paying off your mortgage is that you don’t have the liquid assets you once did.
“If you do choose to pay off your mortgage, establish a home equity line of credit so you can write a check in an emergency,” Evensky said.
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Andrew Leckey answers questions Sunday in Business and Tuesday in Your Money. Address inquiries to Andrew Leckey, #184, 369-B Third St., San Rafael, CA 94901-3581 or e-mail [email protected].