Hey Dave Ramsey, What is 'Growth & Income'?

Definition and Examples of Growth and Income Mutual Funds

investment advice_mutual funds
What does Dave Ramsey mean by "growth and income funds?". Getty Images

When the personal finance guru Dave Ramsey suggests investors use growth and income funds, what does he mean?  Is this a category of mutual funds, an investing style, or both?

Wisely,Dave leaves the details to advisers but your faithful mutual fund guide will provide some insight and cautions for investing in the growth and income objective.

What Are Growth and Income Funds?

The simple definition of growth and income is an investing objective that consists of investing in both growth and income securities.

This is still a deceivingly broad definition because growth is a broad stock investment objective and income can refer to either stocks or bonds (or both). One could even say that a diversified portfolio of mutual funds, consisting of various stock and bond funds, is considered to have a growth and income objective.

Growth stocks are securities of companies that have potential to grow their earnings faster than the average company. Income stocks are those that pay above-average dividends. Bonds, which are included in the broader fixed income category, are inherently income securities because they pay interest to the investor.

A Word of Caution Growth & Income

I like Dave Ramsey and I am happy to tell anyone that he is one of the reasons I began investing in mutual funds, which is also what eventually led to my starting my own investment advisory firm and becoming your humble mutual funds guide.

 

Dave is also good at keeping things extremely simple. Notice I emphasize extremely. This is for good reason: Sometimes keeping things simple can water down the meaning of a word, phrase or concept. I don't think that Dave Ramsey wants to fool anyone but over-simplified, general guidance is far from specific advice and it's important that his listeners understand that.

Many growth and income funds conveniently include the phrase "growth & income" in their formal fund name. This makes investing easier, right?  Perhaps easier, but not better.  For example, one of the best-performing growth and income funds in recent years is Calamos Growth & Income (CGIIX).  This fund does not consist of stocks but rather convertible bonds; there is a large difference.  Another example is Vanguard Growth & Income (VQNPX), which only invests in stocks (growth stocks and value stocks).

Tips on Portfolio Construction and Growth & Income

I won't make the mistake of telling you to invest in growth and income funds as a mutual fund type but I will suggest you learn how to build a portfolio of mutual funds and create an investment objective that suits your needs best. There's nothing inherently wrong with growth and income funds but there is something wrong with telling large audiences that one particular fund type is suitable for anyone to buy and hold.

Furthermore, there are funds that can be considered growth and income that are not always categorized as such. For example, S&P 500 Index funds will naturally hold a combination of growth stocks and value (income) stocks. If an investor already holds a fund like this, and millions do, they don't need another growth and income fund.

But with all that said, even my article here consists of general information that may or may not be applicable on an individual basis. Therefore it is important that investors find funds that suit their personal goals and tolerance for risk and to do their own homework, rather than read or listen to one perspective. Another option is to hire a good investment advisor.