What’s the difference between a growth fund and an income fund? Unless you are a seasoned investor or earn your living in finance you likely believe this to be a trick question. Its actually a pretty simple concept, a growth fund focuses on acquiring assets which increase in value such as a stock who’s price is expected to rise while an income fund focuses on acquiring assets which generate regular income such as interest or dividends. This basic difference is the type of subtly that goes into choosing the proper mutual fund.
Obviously, these are not the only type of funds on the market and there are many great fund options which seek to allow growth as well as income potential. What type of fund should you invest in to attain your goals?
For those who have read any of my previous articles, you are probably sick of hearing me talk about goals. However in personal finance, your goals are the driving factor in making the most beneficial choices on how to spend, save, or invest your money. Its not where you are today that should determine your choices, but where you want to be in a year, 5 years, 10 years, or at retirement that should drive today’s decisions. For instance, to revisit the growth versus income fund query above, if you are retired drawing social security and are fortunate to have a nest egg and want to supplement your income you should choose an income fund. Why? Two primary reasons; one is that income funds tend to be in more stable assets with less risk which produce consistent returns and two…practicality, it would be highly impractical to invest in a growth fund and sell off shares each period to supplement your income. While an income fund’s very design allows it to produce gains which can be distributed without affecting the actual asset.
Not retired, let’s say you are 20 years old and are intelligent enough to know that if you start saving for retirement now you will be light years above your peers after having all those years of growth. Your investment choices should be as aggressive as will allow you to sleep at night. Perhaps you wouldn’t invest in a sector fund such as a real estate because as we all know, a single sector can take a nose dive in a hurry and while you would theoretically have plenty of time before retirement for the market to recover that would not be a pleasant feeling. However you may be interested in investing in a balanced stock fund which allocates its resources between a number of sectors, cap sizes, and hopefully international stocks.
Obviously, I can not cover every possible circumstance that you may find yourself and it is highly likely that neither of the scenarios above are helpful to you. Feel free to email any questions to me email@example.com or simply comment on this post and I’ll do my best to provide information which fits your circumstance. Most large investment companies also offer tools which allow you to input information about your goals and risk tolerance which will suggest a fund that matches your situation. But remember, do your research and know what you’re investing in and how long the mutual fund has been in existence.
by Jeremy R Woods
I value your topic suggestions, if you would like information on a specific topic, please email firstname.lastname@example.org.