What it means
The name describes the mandate. The manager is asked to produce two things at once, capital appreciation and current income, and the portfolio is built to balance them rather than to maximise either alone.
In practice that means large, well-established companies with a record of raising dividends, often in sectors such as consumer goods, healthcare, industrials and financials. Some funds also hold a slice of bonds or preference shares to steady the income stream when equity dividends are cut.
The appeal is behavioural as much as financial. Investors who need income now but cannot afford their capital to stand still get both from one holding, and the dividend component tends to cushion the ride during equity market falls.
Performance is judged on total return, which combines the change in unit price with the dividends paid out. Comparing one of these funds with a pure growth fund on price movement alone understates its result, because a meaningful part of the return is paid out rather than reinvested.
The trade-offs are real. In a strong bull market a growth and income fund will normally lag a pure growth fund, and its income yield will usually sit below a dedicated income or bond fund, which is the price of trying to do both.
In practice
Real-world examples.
Example
A recently retired couple move half their portfolio from a technology-heavy growth fund into a growth and income fund. They now draw about $9,000 a year in distributions while keeping exposure to equity appreciation, and their portfolio's swings are noticeably smaller.
Example
A charitable endowment with a 4% annual spending rule holds growth and income funds as its core equity allocation. The dividend stream covers roughly two-thirds of the required distributions, so the trustees rarely have to sell units at depressed prices.
Example
A company's employee pension default option shifts members from a pure growth fund to a growth and income fund in the ten years before their target retirement date. The change reduces expected return slightly but cuts the chance of a large loss just before members start drawing benefits.
Formula
Calculation
Total return = (capital gain + income distributions) / beginning value
An investor buys 2,000 units of a growth and income fund at a net asset value of $25.00 per unit.
Beginning value = 2,000 x $25.00 = $50,000
Over the year the net asset value rises to $26.50 and the fund pays $1,250 in dividend distributions.
Ending value = 2,000 x $26.50 = $53,000
Capital gain = $53,000 - $50,000 = $3,000
Income received = $1,250
Total return = ($3,000 + $1,250) / $50,000 = $4,250 / $50,000 = 8.5%
That splits into 6.0% capital growth ($3,000 / $50,000) and 2.5% income yield ($1,250 / $50,000). If the fund charges an annual expense ratio of 0.85%, roughly $425 has already been deducted from the net asset value before that 8.5% was measured.Case study
Seen in the real world.
This is an illustrative, fictional example. The Halden Family Trust held $50,000 in a growth and income fund on behalf of a beneficiary who needed modest annual income but had a twenty-year horizon. In its first full year the units rose from $25.00 to $26.50 and the fund distributed $1,250, giving a total return of 8.5%.
The trustee's initial reaction was disappointment, because a pure growth fund in the same period had risen 11%. Looking only at unit prices, the growth and income fund appeared to have gained just 6.0%, and it took a full total return calculation to show that the $1,250 of distributions closed most of the gap.
Two years later the equity market fell sharply. The pure growth fund dropped 22% while the growth and income fund fell 13% and continued paying distributions throughout, which meant the trust never had to sell units to meet the beneficiary's income. The illustrative lesson is that these funds are judged over a full cycle, not in the year the market runs hardest.
Watch out
Common mistakes.
- Measuring performance from the unit price alone, which ignores the distributions that make up a large part of the fund's purpose.
- Expecting a growth and income fund to keep pace with a pure growth fund in a strong bull market, when its whole design accepts less upside for more stability.
- Assuming the dividend stream is guaranteed, when distributions depend on the underlying companies continuing to pay and can be cut in a downturn.
Questions
People also ask.
What is the difference between this and a balanced fund?
A balanced fund holds a fixed split between shares and bonds, while a growth and income fund is usually equity-led and gets its income mainly from dividend-paying shares.
Who typically buys these funds?
Investors who want current income without giving up capital growth, such as retirees, endowments and people approaching the end of a long savings period.
How should the fees be judged?
Compare the expense ratio with the fund's income yield, because a 1.5% charge against a 2.5% yield consumes a large share of the income the fund was bought for.
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