There are differences between growth and income funds, and investing in the wrong one could mean your financial goals are not achieved. These two fund classes employ distinct strategies that cater to different types of investors. One caters to growth-oriented investors with a higher risk tolerance while the other will appeal to investors wanting regular income and less risk. Depending on your goals, investing in one of these types of funds -- or both -- may help you get there.
If capital appreciation is your main goal, then consider a growth fund. Through investing in stocks, the primary goal of this fund is growth of your invested money. These funds provide little (or no) income to investors; the companies held within the fund are attempting to expand and therefore do not distribute dividends. Growth funds are considered high risk as the companies invested in are more volatile than mature dividend paying companies.
Growth fund strategies focus on companies that reinvest capital back into their own expansion. Therefore, the fund focuses on common stock, either domestic or foreign stock, or both. Investing in new companies that are rapidly expanding, the fund hopes to capitalize on a corresponding rise in the share price of the stock.
If you desire regular monthly or quarterly income, then an income fund is what you are looking for. Companies in an income fund typically distribute some of their profits to shareholders in the form of regular dividends. Investing primarily in debt instruments and dividend-paying stocks, this fund is considered a low-risk investment. As the stock market fluctuates and interest rates change, however, it is possible for the investment to gain or lose value. Given the high credit quality of the investments, these fluctuations are usually much less than what is seen in higher-risk funds.
The strategy of the income fund is to invest in high-quality bonds, money market instruments, preferred stocks and dividend-paying stocks. These investments may be domestic, foreign or both, providing some diversification. To further diversify, the fund invests in debt instruments maturing at various future dates. Most income funds do not invest in debt instruments maturing in less than one year.
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