Growth and income funds are mutual funds and exchange-traded funds (ETFs) that invest in stocks or other securities that combine for long-term growth and short-term income. They provide balance to a portfolio. That way, it can earn money for the present and the future.

Although investors often buy growth and income funds for diversification purposes, there may be other investment strategies for these versatile funds.

Learn about growth and income funds. Also, find out when and why you can benefit from them.

What Are Growth and Income Funds?

As the name suggests, the growth and income objective for mutual funds is a combination of two parts: one part growth and one part income. Growth stock funds hold stocks of companies that are expected to grow at a faster rate compared to the stock market. Income funds seek to provide an investor with a source of income through dividends.

Important

Dividends can represent immediate passive income; or, you can choose to reinvest them by buying more stock.

Income stock funds are often lumped with value funds. But they arent 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 Does Investing in 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.

Many mutual funds with the growth and income objective have the phrase growth & income in the formal name of the fund. This is in order to make research and access easier.

Note

Prominent and differing examples of growth and income funds include Fidelity Growth and Income (FGRIX) and Vanguard Growth & Income (VQNPX). These invest in growth stocks and value stocks with no exposure to bonds.

Should You Invest in Growth and Income Funds?

The term growth and income is communicated often in financial media outlets. But the meaning tends to get lost amid the noise. For instance, lets say you hear a personal finance guru or radio personality mention growth and income as a suggested mutual fund portfolio holding. In this 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.

For many investors—beginner or advanced—a better 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.

Also, many investors already have funds with a growth objective and funds 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. This reduces portfolio diversification and increases market risk.

Key Takeaways

  • A growth and income fund invests in a mixture of securities to provide both short-term income and long-term investment growth.
  • Many major investment firms offer funds that are specifically labeled as growth & income funds.
  • Index funds such as the S&P 500 index typically offer a good mix of stocks and bonds to fit a growth and income strategy.

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