Mutual Fund Question. What is the difference between Growth Funds, Growth and Income Funds, Equity Income?

Question

Difference between Growth funds, Growth and Income funds, Equity income funds, and Balanced Funds.

I know some say they "emphasis" on income or dividends etc... what does that really mean? I am using them in my ROTH IRA--- so what would "income" or "Dividends" do for me there?

Answer 1

Great question!

Here's the simple breakdown:

Mutual funds are nothing more than a basket of individual stocks.

Individual stocks are usually categorized as either growth or income.

Growth stocks typically have low or no dividends.

Income stocks typically have high dividends.

When a publicly traded company earns a profit, it can either keep the profit and reinvest it into the business (open new stores for instance and increase sales), or pass that profit along to shareholders.

If you own an income stock in your mutual fund, you are a shareholder and receive a portion of those dividends.

So a growth fund focuses primarily on stocks that do not pay dividends, while an income fund focuses on stocks that do pay dividends, thus producing a stream of income for the investor.

Some income funds are baskets of bonds instead of stocks, but an Equity Income fund invests in stocks.

SO.....

Growth Funds: Invest in growth stocks, but produce little or no income.

Growth and Income Funds: These invest in a mix - some growth, some income.

Equity Income: Invests in income (dividend paying) stocks, not bonds.

Balanced Funds: typically try to mix their investments between both stocks and bonds, but derive the majority of their income from the bond portion.

What do dividends do for you?

Well, this is where the effect of compound interest comes into play. If you re-invest those dividends, it will be like consistently adding to your portfolio without having to take money from your paycheck.

Also, income funds and stocks are essentially to your portfolio once you retire because the income they provide should replace your paycheck.

The next natural question is: Which is right for you?

For that answer, you'll want to research asset allocation and figure out how far away from retirement you are.

Answer 2

Growth funds invest in companies that are growing quickly.

Income funds invest in companies that return a god income to the owners (ie companies with high dividends)

Growth and Income looks for companies that do both (growing and good return) or that do either of these really well.

Balanced funds seek out some growth companies, some income, some value, some mixed - attempts to achieve safety thru diversification.

If its for an IRA, income may not help you as you can't get the money out anyhow, but if its a good mutual fund it may not matter what it invests in.