Mutual funds pool investors' money and buy large lots of stocks. Each mutual fund has a charter, listed in its prospectus, that dictates the style of the fund. For example, some funds invest in stocks that seem likely to grow in value. These are growth mutual funds. Other funds invest in stocks that pay dividends. These are dividend mutual funds. Your decision about which style to invest in depends on the results you want.
Growth Fund Advantages
Mutual funds that invest for growth seek a rise in share prices. The share price of a mutual fund is the average of all the share prices the fund owns minus expenses. If you buy into a mutual fund for $25 per share, for example, and it rises to $35 per share, your original investment has made $10 per share. This type of fund offers you the advantage of increasing your portfolio value.
Growth Fund Disadvantages
Funds holding growth stocks don't pay dividends. One way stocks grow in price is that the issuing company reinvests profits instead of paying them out as dividends. Your investment in a growth mutual fund will not provide you with income, and you will have to wait until you sell your shares to get any money from your investment.
Dividend Fund Advantages
Dividend mutual funds typically pay quarterly dividends, though some pay dividends monthly. You can choose to reinvest those dividends in the fund, or you can ask that the dividend be paid to you. You can realize an income from such an investment. This appeals to retirees and people who want to supplement their income from their investments.
Dividend Fund Disadvantage
Dividend mutual funds tend to have lower price appreciation than growth funds. The dividends come out of company profits, so the share price does not rise the way shares rise for growth funds. In addition, the dividend rate is not guaranteed. Dividends can fall if the underlying stocks reduce their dividends.
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