Income stock funds are often lumped with value funds, but they aren’t the same thing. Value funds mostly invest in stocks that an investor thinks are selling at a low price in relation to earnings or other value measures. They may or may not pay dividends. Their main goal is to earn a larger-than-average return. Income funds, on the other hand, are mostly focused on providing immediate passive income.
How Do Growth and Income Funds Work?
Growth and income funds can be made up of a variety of securities. Keep in mind that the income portion of the growth and income objective does not strictly limit the fund holdings to income-generating stocks. The income objective of the growth and income fund can also be achieved through fixed income instruments. These could include bonds, for example. The term “growth and income” is communicated often in financial media outlets, but the meaning tends to get lost amid the noise. For instance, suppose you hear a personal finance guru or radio personality mention “growth and income” as a suggested mutual fund portfolio holding. In that case, they are not necessarily recommending a particular fund. Rather, they are talking about an overall objective or fund type, which is quite broad, to say the least. Many mutual funds with the growth and income objective have the phrase “growth and income” in the formal name of the fund. This is in order to make research and access easier.
What It Means for Individual Investors
For many investors—beginner or advanced—a good approach to growth and income may be to access these stocks by simply investing in one of the best S&P 500 index funds. This will provide exposure to growth and value stocks. You may also choose to invest in a bond fund, which will complete and add to the income side of the growth and income objective. At the same time, it can help reduce overall market risk to the portfolio. Many investors already have funds with a growth objective and others with an income objective. Adding an additional growth and income fund could cause too much fund overlap, meaning that you own multiple funds with similar profiles. That would reduce portfolio diversification and increases market risk.
