We have now had three interest rate cuts by the Reserve Bank since late last year. Before that it was easy to earn five per cent on bank deposits. Now four per cent is about the limit. Another cut is expected in November.

That’s good news for home buyers and other borrowers. It’s bad news for retirees and people needing income from their investments. Even if four per cent is earned, if that is spent, inflation at three per cent will see the investor going backwards. If income tax must be paid, it’s even worse.

Bank deposits aren’t a solution for long term investment. Better returns are needed, with security of course. A little capital growth to offset inflation can be a real help too.

There are a range of income funds. They differ from term deposits in that they vary in value at least slightly over time, but most provide higher total returns.

Some invest in government and semi-govt bonds and cash. They usually perform a little better than term deposits. For example Pimco Bond Fund has returned about 5.5 per cent per annum over the last few years.

Some fixed interest funds lend more widely, to companies with strong credit ratings for example. These include Perpetual Diversified Income Fund which has paid 6.4 per cent income lately. Some fund managers offer higher yielding credit funds where borrowers are a little below top grade.

The major, well regarded fund managers that have been around for generations offer more security. Their funds lend to many borrowers to spread risk. The funds are stable with only small fluctuations in value.

Investors should be very wary about advertisements that promise extremely high interest returns. If the money invested is lent to borrowers who will pay 12 or 15 per cent interest, there is bound to be a risk of default. They are best avoided.

Two such funds have failed recently, the Shield and First Guardian Master Funds.

It is important to differentiate between the risk of failure and the risk of fluctuating values. The former must always be avoided, the latter can be accepted and will usually mean higher returns.

Some income paying funds buy shares in major companies paying regular, reliable dividends. They also usually achieve a low rate of capital growth. Ausbil Active Dividend Income Fund has paid around 6 per cent income and 3 per cent growth long term.

Most property funds pay high incomes derived from rents. Incomes usually rise as rents increase. Infrastructure funds also usually pay high and rising incomes. There are good options to earn a sound investment income despite falling interest rates.