Growth funds and income funds are two popular options for investors but have differing philosophies with different risk and return factors. It’s important to understand the difference between each to make the best decisions in your financial planning. While each provides great benefits it’s important to factor in the negatives as well. Each provides great benefits but have different ways of providing them. Let’s take a deeper look at the difference between growth and income funds.
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Understanding the fundamentals of each type of fund will help you understand their differences and how they help investors achieve their goals. Growth funds are –- as the name implies –- funds that are centered on growth. They invest more aggressively in companies that show above-average growth. These companies reinvest their earnings in expansions and research and development which results in immense growth opportunities.
The focused nature of growth funds also leads to higher risk though, and this is an important consideration for those who are risk-averse and who want to maintain as much of their capital as possible.
Retiring soon? You may not want to risk your capital in a growth fund, despite the promise of higher growth.
Growth funds also don’t offer dividends or a means of earning monthly income. You’re also most likely to need to stay in this fund for a longer time frame to take advantage of the growth.
Income funds take on the opposite philosophy. They’re typically invested in companies that provide monthly or quarterly dividends, and provide a lower return with lower risk to match. These funds are offered as private, mutual, or exchange-traded funds and are usually structured to avoid costly capital gains and appreciation.
Income funds make for great passive income and the more capital you have, the more money you stand to make on your investment. They provide income at regular intervals and can be a great hedge when the market is volatile as they’re lower-risk options.
When considering an Income Fund Vs a Growth Fund it’s important to consider your financial situation and what your goals are.
Now that we understand how each option works, we can dive in on their specific differences. Growth funds are designed to provide aggressive capital accumulation and offer higher returns at the cost of higher risk. There are growth funds out there with great past performance, but it’s important to keep in mind that historical performance isn’t an indicator of future performance. There’s too much complexity in how each individual fund is managed and how the market moves to make any guarantees!
Income funds are designed to provide passive income at the expense of higher returns. This also means lower risk, and also means they’re safer in volatile markets. Dividends are commonly offered as the income vehicle and these funds help avoid serious tax liability by avoiding lump-sum capital gains.
As a generalization, income funds are great for those looking to take less risk, preserve their capital and make monthly income. The risk and return of income funds are great for those close to retirement or who have earned substantial capital.
Growth funds are ideal for those looking to enjoy aggressive returns at a higher risk point and earn enough capital to get to an income fund level. The risk and return of income funds are ideal for those who have the time and ability to re-earn potential losses.
When looking at the differences between an income fund and a growth fund, consider how much capital you have and what you’d like to do with that capital.
Where growth funds are optimal for maximizing returns, growth and income funds offer a blend between high returns, monthly income, and lower risk.
Growth and income funds are typically rated as blended funds. This means they’re structured in a way that falls between growth funds and income funds. It’s important to note that blended funds might be managed in preference of growth or income, so it’s important to look at your prospectus and check to see where the mix of investments lies.
Unlike pure growth funds, growth and income funds may offer dividends. This makes them a great option for those who are less risk-averse but would like to earn income on their capital. Growth and income funds also offer high potential returns but might do so at a lower scale than growth funds.
The comparison of growth vs growth and income funds comes down to one fund option offering growth only and the other offering growth and income with lower risk.
It depends! Your goals should dictate your investment strategy and both growth funds and incomes funds have a place in every portfolio. Investing in both might also be a great option, and growth and income funds provide an avenue to do it. Keep in mind that growth funds are ideal to accumulate capital, but are risky. Income funds are ideal for those who already have capital and would like to earn passive income. Commercial real estate investing is another great option for those who looking to diversify their portfolios.
So whether it’s better to invest for growth or income will ultimately come down to you and your goals.
The best practice is to consult your financial professional, think about your goals, and plan for your financial future. Keep in mind that not every fund is a good fit and there are risks trading income funds and growth funds alike.
When you’re ready to deep dive into the world of income funds, growth funds, and investing, get your professional guidance for your investment decisions from proven experts in financial services — Saint Investment Group. Contact our team for a free consultation and discover more ways to make your money for you today.
A growth fund's principal purpose is to create capital appreciation over the long term by investing in firms with significant growth potential.
Typically, growth funds invest in the stocks of firms in rapidly expanding industries or those with high profits growth potential.
Consequently, these funds are better suited for investors with a long-term investment horizon who are ready to assume greater risk in search of higher returns.
A fundamental purpose of an income fund is to provide investors with a steady stream of income, often in the form of dividends or interest payments.
In addition to high-yielding equities, income funds invest in a variety of fixed income products such as bonds, mortgages, and other debt instruments. These funds are often seen as having a lower level of risk compared to growth funds and are better appropriate for investors wanting a stable and regular income stream than capital appreciation.
Growth funds are often thought to be riskier than income funds since they invest in stocks of firms with significant growth potential.
As a result, growth funds may face more price volatility and value swings than income funds, which invest in more stable fixed income assets.
However, growth funds offer the potential for larger long-term returns.
Income funds, on the other hand, offer reduced risk but also smaller potential for gain when compared to growth funds. The degree of risk that is suitable for an individual investor is determined by their specific financial goals, risk tolerance, and investment horizon.
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Nic has honed his focus on the Real Estate and debt markets with Saint Investment Group and pursues large-scale Distressed Asset purchases with his partners and syndications.