When finance guru Dave Ramsey suggests growth and income funds, new investors may wonder what he means. Dave refers to his investment advisors for detailed information. Keep reading to learn what you need to know about growth and income funds.
What Are Growth and Income Funds?
The growth and income investing method is simple. It's an objective that consists of investing in both growth and income securities.
This is still a broad definition. But growth is a broad stock investment objective, and income can refer to either stocks or bonds, or both. You could even say that a diversified portfolio of mutual funds, consisting of various stock and bond funds, has the goal of growth and income.
Growth stocks are securities of companies that have the potential to grow their earnings faster than most companies. These are often newer companies that have yet to come into full form, but they are very much so headed in the right direction.
In this case, the companies will often not pay dividends to shareholders. They need to put their profits back into the company to keep fueling growth. The incentive for investors is the growth in stock price.
Income stocks are those that pay above-average dividends. Blue-chip companies are older, well-established companies with a history of paying out consistent dividends. This makes them a safe choice for those seeking income stocks because of their reliability.
A Word of Caution
Dave Ramsey is good at keeping things simple, and this is helpful to many new investors. For many people, he could be one of the reasons they start investing in mutual funds.
Dave Ramsey likely doesn't want to fool anyone. But his over-simplified, general guidance may not be specific enough advice for some investors.
It's important to keep this in mind: Many growth and income funds include the terms "growth" and "income" in their formal fund name. But this name may not provide the full truth.
For instance, one of the best growth and income funds in recent years is Calamos Growth & Income (CGIIX). This fund does not consist of stocks. Instead, it's made of convertible bonds; there is a big difference between the two.
A well-known growth and income fund is Vanguard Growth & Income (VQNPX), which only invests in stocks. While this may deserve the title of "growth and income" fund, there are no bonds in the fund. Many income investors like to use bonds in their portfolios to help them diversify.
The Bottom Line
It could be a mistake to invest in growth and income funds as a mutual fund type. However, it could help you learn how to build a portfolio of mutual funds and create a goal that suits your needs best.
There's nothing wrong with growth and income funds. But there is something wrong with telling large groups of people that one certain fund type is a good idea for anyone to buy and hold.
These are companies that have been around for years, such as Coca-Cola and The Walt Disney Company. Bonds, which are included in the broader fixed income category, are inherently income securities because they pay interest to the investor.
This is general information that may or may not apply on an individual basis, so it is important that you find funds that suit their personal goals and tolerance for risk. Do your own research. Don't just read or listen to one person's perspective.
Also, some funds can be considered growth and income, even though they may not always be categorized as such. For instance, S&P 500 Index funds will naturally hold a mixture of growth and income stocks. If you already hold a fund like this—and millions of investors do—you don't need another growth and income fund.