What is a growth and income fund?

A growth and income fund is a class of mutual fund or exchange-traded fund (ETF) who has a dual strategy of both capital appreciation (growth) and current income generated by dividends or interest payments. A growth and income fund may invest only in stocks or in a combination of stocks, bonds, real estate investment trusts (REITs) and other securities.

A growth and income fund is a type of mixed fundwhich invests in both growth and value stocks.

Key points to remember

  • A growth and income fund is a mutual fund or ETF strategy that seeks total return for investors, including capital gains and current income.
  • The objective of a growth and income fund is to create a diversified portfolio that takes advantage of the capital gains potential of the growth segment and the dividend income and stability of the value segment.
  • Since these funds come in so many configurations, investors should research each potential fund strategy and use a style box for easier categorization.

Understanding Growth and Income Funds

Growth and income funds are popular among investors with a moderate (but not excessive) appetite for risk – the ever-popular “balanced investor”. Although yields are generally lower than those of pure products growth fund, high-yielding stocks sometimes become favored in equity markets, leading growth and income funds to outperform. The stability of these funds looks more attractive when the broader economy appears to be weakening.

Growth and time horizons

Investors in growth and income portfolios favor stability without giving up returns above inflation. Depending on risk tolerance, a balanced investment goal is adopted by people who avoid volatility altogether or reduce their growth goals as they approach retirement. When planning investment strategies, an investor’s age is critical in determining asset allocation and risk tolerance. A 25-year-old investor initially entering the labor market has a longer time horizon than a 70-year-old retiree. Investment advisors suggest that regardless of age, exposure to equities is necessary for any wallet.

However, the percentage of equity exposure changes as time horizons shorten. A rule of thumb among finance professionals is that growth allowances decrease as an investor ages. If individuals subtract their age from 100, the remainder represents the percentage of stocks they should own, with the balance made up of bonds and less volatile cash.

Investors can choose from many funds that meet balanced objectives. Portfolios such as the John Hancock Balanced Fund (“SVBAX”) exhibit low volatility with an average annual return of 7.84% over 10 years through June 30, 2022, below the S&P 500 Index, which reported 12.96% over the same period. .

Income and retirement needs

A retiree’s investment objective involves income needs, a scenario in which income is replaced by personal savings and dividend and interest income. Financial advisers recommend that retirees replace 75% of working wages with income-generating securities such as bonds and large-cap, dividend-paying stocks.

A balanced fund holds a sizable allocation of corporate and government bonds offering semi-annual interest payments while seeking to preserve capital. The less volatile nature of US Treasury and investment-grade bonds combine with the growth potential of equities, providing income and a potential rate of appreciation to combat rising prices of goods and services, ensuring that an individual does not outlive their savings- retirement. Growth and income funds accomplish both of these goals in a single title.

Examples of growth and income funds

The Dodge and Cox Balanced Fund (“DODBX”) had a 10-year average annual return of 9.91% as of June 30, 2022, a metric that outperforms its benchmark index. However, its yield fell below the 10-year Treasury yield, which had a 1-year yield of around 2.832% as of August 4, 2022. Thus, growth and income funds fulfill a dual investment objective under one roof in certain circumstances, such as when interest rates are low.

Although they have the same objective of growth and income, investors should be aware that, just like other types of mutual fund, each fund will have a bias in its investment strategy. For example, the Dodge & Cox Balanced Fund leans toward value stocks, looking for stocks that appear undervalued by the market. Other funds may emphasize the growth or income side of the equation, or have a higher exposure to bonds. Also, while these funds are considered a low volatility category, some have more than others. For example, the Vanguard Growth and Income Fund Investor Shares (“VQNPX”) lists a key risk as volatility due to its full exposure to the stock market.

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