What Are Growth and Income Funds?

Growth and Income Funds Explained

Definition

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 so that it is earning an investor money for the present and the future.

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Definition and Example of Growth and Income Funds

Growth and income funds are made up of securities that are chosen with long-term growth and short-term income in mind. As the name suggests, the 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 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.

Note

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

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.

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 and 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.

Frequently Asked Questions (FAQs)

How risky are growth and income funds?

Growth and income represent two diverging strategies when it comes to investment risk. Growth is usually regarded as one of the riskier investment options, whereas fixed-income investments are regarded as among the safest. Combining these two investment categories in one fund could be thought of as a middle ground between those two risk extremes.

What countries receive foreign tax payments from an international growth and income fund?

You can check a fund's national exposure by checking its holdings. A fund website should make this information easily available. These holdings can be broken down by region, giving you a list of countries and their respective percentages of fund exposure. You won't be able to pin down specific profits to specific countries, but you can get a general sense of which countries will receive taxes from your gains.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. U.S. Securities and Exchange Commission. "Stocks." Accessed July 14, 2020.

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