3 brilliant funds for passive income in the UK

Passive income is the holy grail of personal finance. With this type of income, you get regular cash flow without having to lift a finger.

Looking to create a passive income stream with minimal effort? Here are three brilliant funds to consider investing in.

Passive income with minimal risk

First up, we have the Fidelity Cash fund. This is a short-term money market fund, meaning that it invests in high-quality, short-term fixed income securities and cash-like securities in an effort to provide a healthy yield for investors with minimal risk.

Currently, the yield here is about 4.5% (fees on Hargreaves Lansdown are 0.15%). Income can be tax-free if the fund is held in a Stocks and Shares ISA.

I have some money in this fund as I see it as a great place to park cash I’m not investing (in the stock market). With this product, I can pick up a solid yield and not have to worry about the value of my investment falling.

Itâs worth noting that while short-term money market funds are designed to be risk-free, a large-scale global financial collapse (like the Global Financial Crisis of 2008/2009) could impact them negatively. Thatâs something to keep in mind â while theyâre very low risk, theyâre not as safe as cash itself.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

40+ years of income growth

Next we have the Merchants Trust (LSE: MRCH). This is an income-focused investment trust that aims to deliver a high-and-rising income (along with some capital growth).

It predominantly invests in higher-yield UK stocks. Currently, its yield is about 4.8% (fees are 0.52%).

There are a few things I like about this trust. One is that it has increased its payout every year for over 40 years (so it has provided inflation protection for investors).

I also like the fact that its overall performance has been solid. Over the five-year period to the end of November, it outperformed the FTSE All-Share index while simultaneously generating a higher yield for investors.

Iâll point out that itâs possible to lose money with this fund. If UK dividend stocks underperform, this fund’s likely to underperform too.

I think itâs worth considering as a part of a diversified income portfolio however.

A basket of UK and European high-yield dividend stocks

Finally, we have the WisdomTree Europe Equity Income UCITS ETF (LSE: EEI). This is an exchange-traded fund thatâs income focused.

A rules-based fund, it invests in the highest dividend-yielding European companies (including UK companies) but takes quality and share price momentum into consideration when selecting companies for investment (and excludes companies that do not meet ESG criteria). At present, it offers a yield of about 5.3% (fees are 0.29%).

I see this product as a good portfolio diversifier. While it provides exposure to UK stocks, the majority of the fund (about 80%) is allocated to European equities.

Of course, an economic slowdown in Europe is a risk here. Sized properly within a portfolio however, I think considering it could potentially add value and help to generate a solid passive income stream.

The post 3 brilliant funds for passive income in the UK appeared first on The Motley Fool UK.

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Edward Sheldon has positions in the Fidelity Cash fund. 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.