Utility Funds: A Stable Investment in Essential Services

Investing in utility funds offers investors with an alternative to traditional investments. Utility funds are based on investing in utility companies such as electric, gas, water and sewer companies. Here are the basics of utility funds and why they make a potentially good investment.

What Are Utility Funds?

A utility fund is basically a mutual fund that invests in regional utility companies. Regional utility companies often sell shares to investors, and the shares are purchased as part of the utility fund. In addition to investing and specific utility companies, utility funds may also invest in companies that supply materials to these utility companies. For example, it may include stock in the company that builds electrical service trucks for the electric company. Therefore, all of the investments that make up the utility fund rely upon utilities to bring in a return. If you have ever wanted to get something back out of all those utility bills that you pay, investing in a utility fund could be a way to do it.

Performance

Historically, utility funds have performed very well over the long-term. Everyone looks at paying their utility bill as a part of life. They do not question it and pay it faithfully. Therefore, the returns that this type of fund can provide will be regular and constant. Investors in utility funds also realize some decent growth from dividends as well. The dividends that utility companies pay are usually higher than what you get from others types of stocks. This creates a steady growth curve in the fund and in investors portfolios.

Regional Monopolies

Utilities are one of the few fields that actually allow monopoly. In every region in the country you will deal with a certain utility company for your needs depending on where you live. There is no competition as of right now for utilities. If you want electricity, you go to the electric company that serves your area.

Regional monopolies only make sense when it comes to utilities at it is easier on infrastructure. There is only room for one set up our lines, one set of water and sewer pipes, and one gas main in each particular area. If there were multiple utility companies choose from, it would take up a lot more space to run all of the infrastructure needed.

Since the companies involved in utility funds are monopolies, this basically ensures the success of the fund. There is basically no chance that everyone will stop paying their electric bill or water bill all once. Therefore, the utility companies will always stay in business as long as the current system stays in place.

Advantages and Disadvantages

The main advantage of this type of investment is that it is constant. Utility companies tend to do well regardless of the rest of the market. However, it is not the perfect investment. Due to price regulations, utility companies cannot raise the rates significantly. Therefore, when the cost to produce energy rises, they may not make as much profit as normal.