Growth and Income Funds
Definition
A growth and income fund is a mutual fund or exchange-traded fund (ETF) that seeks both capital appreciation and current income. These funds typically hold a mix of equities (including dividend-paying stocks), bonds, and sometimes REITs or other income-producing securities to deliver total return from price gains plus dividends or interest.
How they work
- Dual strategy: combine growth-oriented securities for capital gains with income-producing assets for steady cash flow.
- Flexible mix: some funds are equity-heavy (emphasizing dividend-paying stocks), others hold substantial fixed income, and some blend both within a single portfolio.
- Style: considered a “blend” fund because they often include both growth and value stocks.
Who they suit
- Balanced investors who want moderate risk and a combination of growth and income.
- Investors nearing or in retirement who need income but still want some growth to combat inflation.
- Those who prefer a single, diversified vehicle rather than managing separate stock and bond holdings.
Time horizon and asset allocation
- Allocation should reflect age, goals, and risk tolerance. A common rule of thumb is to reduce equity exposure as you age (e.g., 100 minus age = target equity percentage), though individual circumstances may warrant different allocations.
- Younger investors can tolerate more growth-oriented exposure; retirees typically shift toward higher income and capital preservation.
Income and retirement use
Growth and income funds can replace a portion of earned wages in retirement by providing dividends and interest while preserving some growth potential. They often hold investment-grade bonds and dividend-paying large-cap stocks to balance stability and appreciation.
Risks and considerations
- Performance trade-off: returns generally lag pure growth funds in strong bull markets but may hold up better in weak markets due to income and defensive holdings.
- Fund bias: each fund has its own tilt—value, growth, equity-heavy, or bond-heavy—so outcomes vary significantly across funds.
- Volatility: equity-heavy funds remain exposed to market swings; bond-heavy funds are sensitive to interest-rate changes.
- Fees and taxes: compare expense ratios and understand tax treatment of dividends vs. interest and capital gains.
- Evaluate the fund’s prospectus and holdings, and use a style box or other tools to clarify its actual allocation and risk profile.
Examples (illustrative)
- Value-leaning balanced funds: emphasize undervalued stocks plus bonds for stability.
- Equity-focused growth-and-income funds: full stock exposure with higher volatility but greater growth potential.
- Classic balanced funds: roughly balanced stock/bond mixes designed for lower volatility and steady returns.
How to choose a fund
- Review asset allocation and historical volatility.
- Check yield sources (dividends vs. bond interest) and distribution frequency.
- Compare expense ratios and turnover.
- Read the prospectus for investment objectives and management approach.
- Consider tax implications in your account type (taxable vs. tax-advantaged).
Key takeaways
- Growth and income funds pursue both capital appreciation and current income through diversified holdings.
- They are suitable for investors seeking moderate risk and a blend of stability and growth.
- Fund strategies and risk profiles vary—research holdings, fees, and bias before investing.