Growth and income investments are not just two of the many types of investments. These are the two major umbrellas of investment strategies. Both types of investments have risks and benefits, both long-term and short-term.
As the names show, one of these makes for a regular income source, while the other builds in value.
The choice of one strategy over the other is unique to every individual in the 8 billion world population. Growth and income both seem equally appealing, and you may want to interchange these as your financial circumstances change. At the time of investment, though, one gets priority over the other, depending on your long-term and short-term goals.
Let us look at the two types of investments individually. And then, we will move toward answering What is the difference between growth and income investments?
What Exactly is Growth Investment?
Investopedia uses quite a self-explanatory term for growth investing, that is, ‘capital appreciation.’ Growth investing is any form of purchase that grows in value with time.
Growth investors look for businesses, companies, and start-ups that are emerging but have a higher growth rate than the mean growth of the respective market. Growth shares may also take a step back once or twice and give you no short-term earnings. And the profits are realised only when you take out your capital.
While growth shares and investments are supposed to grow at a rapid pace, this only happens with certain businesses and stocks. Data analysis such as the return on equity (ROE) and earnings per share (EPS) and evaluating a company’s potential for growth are important in minimising the risk factor.
What Do Income Investments Mean?
Income investment is the profit earned on capital. The capital or the original investment stays safe, and the financial gains in addition to the initial investment count as profits.
Following are some examples and options for a basic income investing portfolio that generates a regular, constant stream of income profits:
- Put capital in government bonds for a specified period and receive bond yield in return
- Buy company stocks that pay quarterly, monthly, or yearly dividends
- Invest in real estate and generate rental income
Another perfect example of income investing is a savings account, which generates a monthly or quarterly interest.
Income investment need not necessarily conserve only the capital. For instance, in real estate, the land or property is a form of growth investment, increasing in value over time. And your rental income makes it an income investment.
Let’s now move on to what is the Difference between Growth and Income Investments.
What is the Difference between Growth and Income Investments?
Growth investing serves to increase the original investment. When stocks are rising, growth stocks tend to overperform the market. When sold at the right time, these shares provide great room for capital appreciation.
Income investing provides a constant income stream from preserved capital and is often in the form of a passive income source. Risks are present with any business, property, and investment, but income investment is comparatively safe.
While income investing provides short-term gains, growth investing is a potential promise for the future. However, the risk factor with growth investment is greater than with income investment. In income investment, you can mostly recover the initially invested amount with at least a slight growth in the principal amount.
Even after extensive research and data analysis, the risk of growth shares regressing, temporarily or for good, is always there. That means the capital in growth shares may either multiply with a huge factor or face a huge loss. You will be in net loss even when the shares grow a small percentage. Because in that case, inflation is a bigger factor, given the long duration.
So, what is the difference between growth and income investments? Risk factors, time horizon, and individual priority of passive income or long-term growth are the major differentiating factors between the two.
Which One is Better: Growth or Income Investment?
As has been established before, funds with a potential growth pattern may show some volatility and give low or almost no dividends. Investors looking for growth of the capital find companies with strong growth prospects that reinvest their profits in business expansion.
Risk is obvious, as is enormous capital growth with a growth-style mandate. Growth investment requires a long investment time frame too. If you don’t have a margin for risk and a sufficient investment frame, income investing or an investment portfolio with both income and growth-share classes is a better idea.
The dividends from the equity or interest can be used as income or reinvested to further increase the overall size of the investment. This way, both can go hand-in-hand, and appropriate changes in the portfolio can be made.
The choice of one as a better option rests with one’s short-term and long-term preferences, available time frame, risk tolerance, and the best use of available options.
The Bottom Line: What is the Difference between Growth and Income Investment?
Growth stocks or shares are the stocks of a company that are expected to increase its earnings faster than an average company in the same industry. Putting capital in such stocks is a great way to grow your principal amount given a certain time frame.
Income investments let you receive once or twice-yearly profits in the form of dividends on equity bonds, rental income, or interest. Payments may go up or down, but the investment remains conserved. The difference between growth and income investment hence lies in the financial goals, time frame, risk, and best available opportunities.
Are you interested in how you can earn income from dividend stocks? Check out our article on
‘How Much Do You Earn From Dividend Stocks?‘.