The Difference Between Growth & Dividend Mutual Funds

by Karen Farnen

The objective of growth mutual funds is capital appreciation, which means a rise in share prices over time. Investors buy them to increase their equity and prepare for retirement or other long-term goals. Dividend funds, on the other hand, strive to distribute regular profits to shareholders, serving investors who need current income. Some types of mutual funds emphasize growth, while others emphasize dividends. Still others strive to deliver a combination.

Growth Funds

Growth funds invest in stocks that are likely to increase in value or share price. A basic growth fund buys less-risky stocks in established companies for capital appreciation over the long term, without regard to dividend income. An aggressive growth fund buys common stock in smaller companies and in newer economic segments, such as technology. An aggressive growth fund has more potential for rapid gains, but it also carries more risk of loss.

Dividend Funds

According to "Kiplinger," approximately 40 percent of the return from stocks over the years has come from dividends. Dividend funds invest in stocks of companies that make regular dividend payments. Sometimes these funds pay higher yields than other dividend- or interest-paying investments, such as bank certificates of deposit or bonds. However, according to CNN Money, the payouts are not as stable as income from CDs or bonds. Your dividends can decrease because companies in the fund's portfolio are not usually obligated to continue payments.

Bond Funds

Retirees and others who want regular dividend income sometimes invest in bond mutual funds.These funds, often called income funds, buy various types of government or corporate debt instruments. The amount of the dividend depends on the type of securities in the fund and their interest rates. Income funds often pay dividends every month, and you can chose to receive the payments or reinvest them automatically. The amount of your dividend fluctuates with market conditions. In addition, the value of bond fund shares normally falls with interest rate increases.

Balanced Funds

Another type of fund, a balanced fund, buys both growth stocks and interest-producing bonds. This strategy aims to combine long-term appreciation and regular dividends in one investment vehicle. "Smart Money" states that this approach suits investors who don't like risk, especially those nearing retirement. Balanced fund shares often don't appreciate as fast as growth fund shares, but the bond income increases the total return. Proportions vary, but 60 percent stocks and 40 percent bonds is common.

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