What Are Growth and Income Funds?

Definition & Examples of Growth and Income Funds

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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.

Although investors typically buy growth and income funds for diversification purposes, there may be other investment strategies for these versatile funds. Let's look at the definition of growth and income funds, as well as when and why investors 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 rate faster in relation to the overall stock market. Income funds seek to provide an investor with a source of income through dividends.

Dividends can represent immediate passive income, or an investor can choose to reinvest them by purchasing more stock.

Income stock funds are often lumped with value funds, but they aren't the same thing. Value funds primarily invest in stocks that an investor believes are selling at a low price in relation to earnings or other fundamental value measures. They may or may not pay dividends, and their primary goal is to earn a larger-than-average return. Income funds, on the other hand, are primarily focused on providing immediate passive income to an investor.

How Investing in Growth and Income Funds Works

Growth and income funds can be made up of a variety of securities. It is important to note 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, such as bonds.

To make research and access easier for investors, many mutual funds with the growth and income objective have the phrase "growth & income" in the formal name of the fund.

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

Should I 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 example, when you hear a personal finance guru or radio personality mention "growth and income" as a suggested mutual fund portfolio holding, they are not necessarily recommending a particular fund but rather 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 growth stocks and income stocks by simply investing in one of the best S&P 500 index funds. This will provide exposure to growth and value stocks. Investors may also choose to invest in a bond fund, which will complete and add to the income side of the growth and income objective while helping 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.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

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.