Whether you want to grow your capital, increase your income or both, this will determine the type of investments you choose. A growth investment is designed to expand the original amount of money you’ve set WHEREAS an income-driven investment is meant to generate regular payments to you, ideally without eating into your money.
Growth investments
An investment grows in value when its price increases and you can sell it for more than you paid for it. The difference between the price you paid and the price for which you sell is known as your capital gain.
Growth investments usually suit people who are willing to keep their money tied up for five years or more. The longer you leave your money invested, the greater the likelihood that you’ll realise a capital gain when you decide to sell.
Although past performance is not an indication of future performance, investors looking to see their assets grow over time should consider investing in the stock market, which is generally considered to be the best home for a long-term investment.
Growth stocks are also less stable than their income-generating counterparts, because there is no guarantee that their value will continue to rise. Many areas of growth tend to be subject to changes in investor sentiment.
Generating An Income
Generating an income from your investment is often an important requirement for people who are retired or approaching retirement or those who need to supplement their salary.
The most popular forms of income investment are bonds (which are also known as ‘fixed income’ investments) and cash, both of which pay a regular, consistent rate of interest either annually, twice a year or four times a year. You can also obtain an income from shares in the form of dividends, and many equity funds are set up solely with the aim of generating a stable income.
Deciding between growth and income investments
How can you decide between growth and income investments? It all depends on your investment time frame, your attitude to investment risk and what you need the investment to provide for you. If you need a regular stream of income, you should focus your portfolio on assets that will help you achieve this, such as cash and bonds that will provide a fixed income. 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 investments.
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 also be prepared to make the necessary adjustments to your investment portfolio and switch from growth assets to income as your investment needs change.
The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.
