Growth Vs Income Investing
Investments can provide returns in different ways. Some may grow in value over time, while others may provide income along the way. This is the basic difference between growth and income investing and many investments can provide a combination of both.
Total return = Income + Capital Growth
What is growth investing?
Growth investing focuses on increasing the value of an investment over time. Think of growth investing like planting a tree. You ’re not planting it for shade today, you’re doing it so one day it’ll grow tall and strong.
Shares and property are common examples of growth assets. Shares can provide capital growth as the value of a company increases, while property may increase in value over time as well as generate rental income.
Growth investments are generally associated with longer investment timeframes, allowing more time for the value of the investment to develop over different market cycles.
What is income investing?
That income can arrive in different ways — interest from cash or fixed income, dividends from shares, rent from property or distributions from a managed fund. Picture income investing as living off the fruit your tree produces. You’re not focused on the tree growing much bigger , you want consistent fruit each season.
Managed funds can also be structured with income as a key focus. Depending on the fund, this may involve investing across assets such as bonds, credit, cash, shares or property that generate income for the portfolio.
Growth refers to an increase in the value of the investment over time, while income is the return received along the way, such as interest, dividends, rent or fund distributions.
Growth and income can work together
Growth and income are two different ways an investment can contribute to your overall return. Take property as an example, a property may generate rental income while it is held, while an increase in the property’s value can provide capital growth over time. Shares can work in a similar way, some investments pay dividends from their earnings, while the value of the shares may also increase too. This means an investment does not necessarily need to be considered purely “growth” or purely “income”, it may provide a combination of both.
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Reinvesting income
Income can also be reinvested to contribute to the growth of an investment over time, rather than being taken as cash.
Some managed funds allow distributions to be reinvested into additional units. This means your investment can continue building, with future returns potentially earned on a larger investment balance.
Key Considerations
A portfolio can benefit from a combination of growth and income investments.
Including both approaches can help create a more balanced portfolio, with the right mix depending on an investor’s goals, financial situation and investment timeframe.
Growth investments may help build wealth over the longer term, while income investments may provide regular payments along the way. Together, they can play complementary roles in helping investors work towards their financial goals.
Please note
This article has been prepared by Selfund for general information and education purposes only.
It has been prepared without taking into account your individual objectives, financial situation or needs. Before making any investment decision, you should consider whether the information is appropriate for your circumstances and seek independent professional advice where appropriate.