Understanding The Difference Between Growth Funds And Income Funds
This article compares the differences between an income fund vs a growth fund.
After reading this article, you will understand the diverse objectives of these funds. The potential risks and rewards. Also, which one may be the best choice for your specific situation.
Let’s get started with several key takeaways…
Differences Between An Income Fund vs Growth Fund: Key Takeaways
Income funds mainly invest in cash-generating securities. Thus providing investors with a steady stream of income from their investment.
While growth funds focus primarily on growth stocks.
These stocks are issued by companies that reinvest most or all of their financial resources back into their businesses. To produce long-term share price appreciation.
Neither type of fund is better than the other.
Because the best fund type will meet an investor’s specific objectives. And those objectives differ from person to person.
Okay. With those key takeaways addressed.
It’s time to dig into the details…
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But for now, back to today’s topic…
What Is An Income Fund?
An income fund is a pool of investment securities. Typically medium-term to longer-term bonds. Also, stocks that pay dividends.
The primary aim of an income fund is to produce a regular income stream for its investors.
First of all, an income fund tends to be less volatile. Meaning their share prices do not fluctuate as significantly as more aggressive investments.
However, the potential for long-term share price appreciation is typically less.
Also, reduced volatility does not mean there is no risk of loss. Because you can lose money investing in an income fund.
Furthermore, these fund types will normally pay fixed income either monthly or quarterly. And once received, the income can never be taken away.
So, using the income received is completely up to you. Spend it, save it, or reinvest it. The choice is yours.
Finally, you need to be aware of income taxes.
Because unless you hold an income fund in a tax-advantaged account. Such as an Individual Retirement Account (IRA).
The income is subject to tax during the year you receive it.
What Is A Growth Fund?
A growth fund is a pool of investment securities. Usually, growth funds invest in stocks that have a good opportunity to increase in value. Sometimes they are referred to as growth stocks.
Thus, the main objective of growth vs income funds is capital gains. Created from share price appreciation.
The companies behind the stocks in a growth fund pay little or no dividends. Because their main objective is profitable business growth.
So, these companies use their capital for reinvestment back into their businesses. Rather than paying income to investors.
As a result, they use their money to make smart investments in people, facilities, technology, product development, and acquisitions.
To increase revenues and earnings. Which is intended to increase the share price.
Finally, shares must be sold for an investor to gain access to the investment returns from a growth fund.
What Is A Growth And Income Fund?
A growth and income fund is a pool of investment securities. These funds combine the characteristics of both income funds and growth funds.
Investment options in growth and income funds will normally include:
- Medium-term bonds
- Long-term bonds
- Dividend-paying stocks
- Growth stocks
Growth and income funds are also called balanced funds. Because they attempt to find the best balance between investing for income and investing for growth.
These funds are offered in many different styles. Because some will focus more on growth. While others will focus more on generating income.
Thus, they have wide latitude. In the types of investments they hold.
But what about the risks to your money. That is next…
Are Growth Funds Riskier Than Income Funds?
Growth funds vs income funds are riskier as it relates to their share price volatility.
First, they typically increase in value more rapidly than income funds during bull markets. And times of economic prosperity.
On the other hand, during bear markets and periods of economic distress. The price of a growth fund will usually drop more dramatically than that of income funds.
But, over the long term, a well-chosen growth fund will typically generate higher investment returns. Versus an income fund.
This is because, over the long run, growth stocks normally outperform income investments. Specifically, bonds.
Next, some help in deciding what’s best for you…
Which Is Better Growth Or Income Funds?
Neither an income fund nor a growth fund is a better choice than the other. Because it depends on an investor’s specific objectives.
So, let’s discuss possible investment objectives, how each fund would serve to meet them, and the pros and cons of income investing vs growth investing.
When To Choose An Income Fund?
Income funds are best for people who:
1) Want a steady stream of income from their investments without needing to sell shares.
2) Desire investments that fluctuate less in value during the short-term.
3) Are willing to accept lower investment returns over the long term.
4) Are capable of reserving part of the income to pay income taxes.
Thus, a fund for income may be the best choice for those who are older. And closer to retirement.
Thus, having less time to recover from stock market losses. And desire to supplement their income with cash flow from investments.
When To Choose A Growth Fund?
Growth funds are better for individual investors who:
1) Will accept the need to sell shares to service their cash requirements.
2) Can handle greater share price volatility in the short term.
3) Want to maximize their investment returns over the long-term.
4) Prefer holding an investment that only incurs taxes when sold.
Thus, a growth fund may be best for a younger investor.
Because they have the time required to ride out the ups and downs of growth stocks and the stock market. In pursuit of higher long-term investment returns.
When To Choose A Growth AND Income Fund?
Growth and income funds are the best choices for investors who desire a balanced approach to their investments.
And care to invest in only one fund that delivers that approach.
However, be cautious when choosing growth and income funds. Because they typically have very broad investment mandates.
Some will focus more on income-generating securities. Others will focus more on growth investments.
So, it is especially important to due to your research. To understand exactly what you are investing in.
After all, it’s your money!
Next, before I wrap up. Just a few other tips for you to think about…
Are There Other Considerations When Investing In An Income Or Growth Fund?
You may be confronted with some other questions, issues, and opportunities. When selecting and investing in the right mutual fund for your needs.
Some things to consider as you research income vs growth funds include…
Fund Investment Fees
Keeping costs low is an important aspect of successful long-term investing.
By sticking with the larger investment companies. Such as Vanguard or Fidelity to name just a couple. You should have plenty of low-cost mutual funds and exchange-traded funds to choose from.
Fund Track-Record
Although past performance is never a guarantee of future investment returns, it’s a good idea to look at a fund’s past results.
Investigate what the fund’s average annual return has been over the past 10 years. What was the best year’s performance? And what was the worst?
By looking at past results, you will get a better idea of what to expect moving forward.
While you are doing your research. Look at the fund’s top holdings too.
This will give you a better idea of the fund’s approach to selecting investments.
Invest Regularly And Consistently Into Your Fund
By investing a small amount regularly. Let’s say $100 every month.
You take advantage of the ups and downs in the financial markets. Buying more shares when prices are low. And fewer shares when prices are high.
This is known as dollar-cost averaging.
Reinvest All Income When Possible
By choosing an income fund or growth and income fund, you will soon start receiving cash from your investment.
If possible, reinvest the income right back into more shares of your chosen fund. This is an excellent way to compound your wealth.
That is if you do not need the income. To pay for your living expenses.
Finally, to manage your entire financial picture. Including expenses, your budget, and investments.
Consider the online tool from Personal Capital.
Personal Capital is a great resource. For making the most of your money.
Conclusions About Income Funds Vs Growth Funds
I hope you have found today’s article comparing an income fund vs a growth fund helpful.
In my opinion, one of the most important takeaways is that neither type of fund is better than the other. Because they have different objectives and purposes.
So, the best fund is one that has low investment fees. And matches up closely with your stage in life and investments objectives. No matter what they are.
Author Bio: Tom Scott founded the consulting and coaching firm Dividends Diversify, LLC. He leverages his expertise and decades of experience in goal setting, relocation assistance, and investing for long-term wealth to help clients reach their full potential.