If you’re learning how to manage your investments, you may not know whether to choose a growth fund or an income fund. Investment funds fall into two broad categories – income and growth. An income fund investment earns from the dividends from the company where the money is invested. A growth fund is designed to grow the initial investment as much as possible. Income fund investments are usually made in more mature companies, and the returns are generally less, but less risky. Growth fund investments are often made into newer companies with an expected fast growth rate and are seen as riskier. The new investor may make a choice to go with the faster, more profitable growth investment so they can increase the amount of their return in the beginning.
Growth funds started in 1928 when Wellington Fund launched funds publicly of stocks and bonds. The growth of mutual funds was slow after the Great Depression, but during the 1960’s, mutual funds growth began to show more promise. During the market surge between 1980 and 2000, growth funds quickly became a popular investment.
There are several definitions of growth funds, but here are the characteristics they usually have. It is an investment in stocks, rather than bonds or CDs. The goal is to make money on returns through the stock price appreciation, and not dividend returns.
The biggest benefit is the greater gains that can be earned during a time that the company is booming. Faster company growth and income, means the stock prices go up quickly, which translates to greater income return (gains) on the growth fund investment. An investment in a new company can help the company through rough times and improve your chance of success at the same time.
Companies that do not have a long history of success or failure are the risk you take investing in a growth fund. Like many other investment strategies, it’s a gamble. As you might imagine, if the company goes bust, the loss for the investor can be significant.
Businesses that are growing in both earnings and revenue that is at a rate far above the market’s average growth rate can be a sound investment. This means you need to spend time learning how to watch the market for the type of companies that are on the rise in the market. There are no guarantees of which type of company would be the best investment, but as you gain experience, you can make a better estimate.
In today’s market, there are thousands of new companies specifically focused on growth. Many established companies will go through transformation changes with the plan for the company to grow quickly in today’s market. Watching the market will help you see how many companies are marked for growth.
Growth funds play an important role in your investment portfolio, but they also play a role in shaping the future of society. Investing in new business ideas help them through the instability cycles that a company can go through. Think about new business ideas like Amazon and Apple. When they started out, many thought they were crazy ideas that would never be much. Those that believed in the idea and invested, helped them grow into the major businesses they are today with a huge return.
The best recommendations are to invest two ways – in both the income and growth funds. The income funds are more stable, and your investment will likely grow at a slow, steady rate. Investing in growth funds can offer you more growth at a faster rate, but is riskier. By investing both ways, you’re more likely to have two types of returns.