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Investing for income or growth

Investing for income

If you require regular income you can invest in a fund that pays out dividends from equities or interest from bonds, rather than have your returns invested back into the fund. Typically, income funds pay out twice a year but this can vary so it’s important to check the literature on individual funds. You also need to be aware that income payments can go down as well as up.

When buying a fund for income you should purchase income units (or share classes), rather than accumulation units.

You can assess how much income a fund might generate by looking at its yield. This is a measure of income as a percentage of the value of the fund, but the amount is not guaranteed and you should take care when comparing the yields of different funds:

  • Equity funds quote a historic yield figure usually covering the previous 12 months up to the last dividend declaration date and based on the fund price at that date
  • Bond funds, on the other hand, quote a distribution yield which reflects the amount that the fund may distribute over the next twelve months (although these figures are not guaranteed and may change) as a percentage of the share price of the fund on the last working day of the previous month

Investing for growth

Investors looking to grow their capital over time should think about equity funds which adopt a growth style. You should always firstly consider your appetite for risk, as equities can be more volatile than other forms of investment.

Most growth funds pay lower or even no dividends, and whilst they can be more volatile in the short-term than income producing funds, they can also provide investors with the prospect of greater returns over the long-term.

If you want to focus on growing your money, rather than taking an income from it, you can choose the share class of a fund which reinvests any dividends to increase the size of your overall pot.

The other way to capture growth is to buy a fund with a growth style mandate; focusing on companies with strong growth prospects. These companies tend to reinvest profits in business expansion in contrast to more mature industries which have tended to pay out higher dividends.

When buying a fund for growth it is usual to purchase accumulation units (or share classes), not income units. With accumulation units, the net income is automatically reinvested into the fund which increases the fund price. Although, it is sometimes possible to purchase income units and to have the dividends reinvested back into your portfolio to buy more units.

The two types of funds most often associated with capital growth are:

  • Equity funds that invest in company shares
  • Multi-asset funds – investing in a range of asset classes

Income, growth or both?

How can you decide between income and growth investments? It all depends on your investment time frame, and what you need the investment to provide for you. If you need a regular stream of income, you should focus your portfolio on funds that will help you achieve this. If you have a longer investment time period, or you do not need an immediate income, you should think about a larger allocation to growth-focused funds.

Whatever your preference, if you hold a variety of investments, both growth and income, you should be better prepared for whatever economic ups and downs might be ahead. As your financial situation changes over time, you should be prepared to make the necessary adjustments to your portfolio, and switch from growth funds to income ones (or vice versa) as your needs and objectives change over time.