One of the first considerations when investing is your investment objective. Is your investment objective income, growth or both?
Funds aim for either income, capital growth or both. Growth-focused funds seek to increase your invested cash over time. Typically, they target expanding businesses, where profits are being reinvested to widen operations, perhaps across different markets.
If a company is successful and grows more profitable over time, the value of their shares should increase.
Growth firms tend to be smaller and their share prices more volatile.
One strategy, growth fund managers employ to increase investors’ capital is to spot companies deemed to be undervalued by the market. An expectation that the share price will increase creates an opportunity to benefit.
Younger investors tend to look for growth style investments. This is because they have a longer time to invest.
Income funds on the other hand, seek to generate income on your investment. Typically, income from these funds and trusts will involve shares that pay a regular dividend. Government or corporate bonds that pay a coupon, or property that pays a yield. Firms that pay dividends tend to be larger and more established.
Broadly speaking, income strategies are a less risky alternative to growth and often attract investors wishing to draw a regular income.
Income-style investments tend to be bought by older investors, especially the retired, who are looking for income to replace salaries they used to receive.
It’s worth noting though, that for any investor, you can either choose to take the income or you could use it to buy more shares in the investment it came from. Reinvesting income in this way, is called compounding.