The concept of the investment fund is a wonderful and innovative devise that aids investors through diversification, ease of management, and access to premier assets, all at a relatively small fee. The most common type of funds that are often considered and compared are income vs growth funds, as they appeal to distinct investment strategies.

Understanding the distinction between the two helps one understand investment funds themselves.

Both income funds and growth funds together highlight that investment vehicles are designed to facilitate investors with a range of motivations and objectives. They each deliver optimal avenues for funds to be committed to, to ensure desirable outcomes.

In this article, we draw a striking juxtaposition between the two most popular types of funds: income vs growth funds. We explore the key differences between each while diving into their inner workings mechanisms.

Definition

To begin our assessment of income vs growth funds, it would do well, to begin with a definition of each of the two funds, as a starting point before delving deep into each. This would set the context for an in-depth comparison between the income funds and growth funds:

The definition of the two types of funds is as follows:

• Income Funds

  An income fund is an investment fund designed to deliver stable income to its shareholders, by primarily investing in fixed-income securities such as bonds and preference shares, as well as high-dividend stocks such as REITS.

• Growth Funds

  A growth fund is an investment fund that specifically focuses on long-term capital growth for its holders. It does so by investing mainly in entities with high-growth potentials, such as the tech industry, or promising players from developing economies.

Key Difference Between Income and Growth Funds

The key difference that sets apart income and growth funds is the central focus of each investment strategy, with one looking to capture income, and the other growth. For this reason, they appeal to distinct types of investors.

• Income Funds

  Income funds, as the name suggests, are investment funds set up to ensure a stable stream of income for its investors. They include bonds, preference shares, REITs, and any security that allows for consistent and timely income to be generated.

  Due to the nature of these funds, they usually target those with a low-risk appetite and those who do not prioritize growth. This makes it a favorite for those approaching retirement, and seeking steady pension payments.

• Growth Funds

  On the other hand, growth funds are specifically run with the goal of maximizing capital appreciation, and thus invest in entities with high growth potential and report stellar performance growth.

  In their chase for growth, these funds often experience volatilities and are less stable than pure income-delivering securities such as bonds. Because of this, they are more popular among risk-tolerant investors who can overlook short-term disruptions.

Example of Growth and Income Fund

In order to contextualize the comparison between both growth vs income funds it would be prudent to turn to real-life examples, in order to determine how each is practically observed in the financial markets.

Listed below are a few growth and income funds that are currently active in the investment spaces. These are as follows:

• Growth Fund: Eagle Capital

  Eagle Capital Growth Fund (AMEX: GRF) is a closed-end equity mutual fund, that invests in a wide range of American sectors that promise high growth potential.

  It uses the S&P 500 as a benchmark for performance, in order to beat the market in terms of growth.

• Income Fund: Apollo Tactical

  Apollo Tactical Income Fund (NYSE: AIF) is also a closed-end equity fund, but one that has established itself as a fixed-income investment.

  Its portfolio consists primarily of senior notes, bonds, and other credit securities. It also has sizeable equity investments in high dividend-yielding companies.

How Do Growth and Income Funds Work?

Despite stark differences in the income vs growth funds comparison, the basic manner in how they work is quite similar in principle. Although they have vastly dissimilar approaches, at their core, they are each investment fund, seeking market winners.

The following core concepts help each of the two classes of funds work. They are elements common among the best growth and income funds:

• The Pooling of Funds

  As is typical of large investments, both income and growth funds involve the pooling together of investor capital, from a large number of investors.

  The cumulative sum of these funds is used by the fund manager to build up a portfolio of financial assets that are aligned with the fund’s broader investment strategy.

• Portfolio Allocation

  The management of the fund builds up its investment portfolio with a deliberate and precise structure, which gives it exposure to financial assets that best meet the needs of the fund.

  The fund will ensure that, as market and economic conditions shift, the portfolio too remains optimal, from an investment standpoint, while maximizing value for its investors, based on the chosen investment approach.

• Diversification

  Diversification stands as a critical hallmark of investment funds and lies at the heart of how these investment vehicles work.

  When fund managers build up a portfolio, they ensure that it is well diversified, i.e. it has exposure to a wide range of securities and sectors, to minimize risk exposure. The fund has one’s capital thinly spread across a wide range of investments.

Can You Invest for Growth and Income

Although the growth fund vs income fund comparison would portray each type of investment as complete opposites, most investors seek both outcomes at varying degrees, attempting to strike a suitable balance, based on their approach.

• Mixed Portfolio Funds

  A wide range of mutual funds assesses its performance on the basis of both growth and income. It does so by building up a portfolio that has exposure to securities that deliver both kinds of outcomes, such as stocks and bonds.

• Dividend Stocks

  Dividend stocks are a sure way to attain both income and growth. With steady dividend payouts, they ensure an ongoing stream of income to their shareholders, whereas its appreciation with business expansion allows for capital appreciation.

  It is important to note, however, that high dividend payout companies usually report slower earnings growth as most of the profits are distributed to shareholders, rather than being reinvested into the business to boost growth.

• Passive Exchange Traded Funds

  Another way to attain the benefits offered by both income vs growth funds is to invest in a passively managed exchange traded fund (ETF). These simply track the movement of a market index such as the S&P 500 or a sector index.

  These not only grow along with the index being tracked but also deliver income to its holders in the form of dividends. This is due to the particular index containing dividend-paying companies within it.

What It Means for Individual Investors

Now that we have broadly covered the similarities and distinctions between income vs growth funds, it would do well to understand what they mean for individual investors in a practical sense.

Here are a few things you would need to consider if you are looking to commit your savings to either an income or growth fund:

• Fund Investment Fees

  Knowing about the fee structure is essential for investors. They often have a direct impact on the return, when they are tied in as a backload or sales fee at the time of redemption. Different funds have different fee structures.

• Fund Track-Record

  The track record of the fund is an important way to judge its performance, regardless of whether one seeks growth or income. Funds with the best credentials usually have a stellar track record to prove their investment capability.

• Investment Objectives

  Individual investors must consider what specific objectives they have before selecting an adequate investment fund, whether they want to prioritize growth or income, or whether they want to strike a perfect balance.

• Risk Tolerance

  Risk tolerance too would ultimately differ from investor to investor, and would thus play a significant role in determining which investment fund will be selected.

  The most risk-averse investors would not mind going with high-risk high-reward funds, even if it contains volatile assets such as cryptocurrencies. Alternatively, those with low-risk tolerance would prefer mutual funds focusing on bonds.

Conclusion

In this article, we attempted to draw a juxtaposition between income vs growth funds, while also delving into their fundamental similarities. They each offer unique opportunities to investors with vastly distinct objectives and outlooks.

Despite the stark contrast between the two, both income and growth funds share some core principles, such as portfolio allocation, fund pooling, and diversification. Most often strike a balance somewhere between growth and income.

At the end of the day, the type of investment fund selected will boil down to the individual investor who has a distinct investment approach, risk tolerance, and understanding of the wider financial markets.

FAQs

Which Type of Fund is Better: Income or Growth?

There is no better fund between income and growth funds, as the preference would be different from investor to investor, who each seeks different outcomes. These outcomes could be income generation or capital appreciation.

Can Investors Combine Income and Growth Funds in Their Portfolio?

Yes, investors can combine both income and growth funds in their portfolios to strike a balance that is suitable to them, and in line with their investment approach. This would be a diversified portfolio covering both possible outcomes.

Are Growth Funds Riskier than Income Funds?

Yes, growth funds generally are riskier than income funds. This is because high-growth potential stocks typically are far more volatile than steady-income securities. Due to this, those with a higher risk tolerance normally go for growth funds.

Looking to up your trading game? Get ready to learn all there is about stock resistance levels! With this market tool, you could be at your A-game when trading stocks