When you start investing, it’s likely you’ll be asked to decide what type of funds you’d like to put your money into: growth, or income.
To put it another way, you’re being asked to decide what you’d like to get out of your investment. Do you want to increase the value of your investments over time, aiming for a potential profit in the future? Or would you rather have a regular income earlier on?
If it's the former, you should look at growth funds; if it's the latter, it might be better to focus on income funds. Remember that all types of funds have their risks – as with all investments, they could go down as well as up and any income from them is not guaranteed. You may get back less than you've put in.
Ultimately, which fund you choose depends on your financial goals and future plans. While this article aims to provide a helpful overview of the differences between growth and income funds, it is not intended to give advice or a personal recommendation. If you need a personalised recommendation based on your personal circumstances, you should seek financial advice. You can find a financial adviser in your area at www.unbiased.co.uk. A financial adviser will usually charge for their services.
What are funds?
Funds allow you to invest in more than one asset at once. An asset is anything with monetary value - things like company shares, property, or government bonds, to name just a few.
Generally speaking, investing in funds is a way of trying to achieve diversification with your investments. Here’s more about the basics of funds. Find out more about the basics of funds here.
Growth funds, also known as accumulation funds, aim to increase the value of your investments over time. The idea is that you’ll be able to sell your investments for a profit in the future – but you’ll need time to weather the ups and downs of the market.
Growth funds will often focus on buying shares in companies that have potential for growth, like technology companies. In this case, you’re essentially betting that a company will show a good return over time.
Unsurprisingly, growth funds perform best when the economy is growing. The idea is that funds grow at a faster rate than the stock market – but, of course, this isn’t guaranteed.
Are growth funds for me?
You’re most likely to benefit from growth funds if you’re happy to wait until you cash-in on your investment. For pensions, it may be you’re younger and have a long time for your investments to grow before you retire. Or if you want to put some money away in a long-term investment, growth funds could be the answer.
Income funds, as the name suggests, aim to give you a regular income. They do that through earnings from the dividends of the companies that your money’s invested in. For that reason, income funds are often made up of shares in stable, established companies that are known to pay competitive dividends.
However, when it comes to many pension funds, the aim is long-term saving for a greater retirement pot, so dividends are usually ‘accumulated’ back into your pension rather than paid out as income.
Are income funds for me?
If you want your investments to pay out to you regularly, it could be a good idea to select an income fund.
What about tax?
SIPPs and ISAs are tax efficient, so you won’t pay tax on the profits you make on your investments through them. If you’re investing outside one of those, including via our Investment Account, you may have to pay tax, regardless of whether you choose a growth fund or income fund. The information below applies to funds held in an Investment Account or similar investment.
With both growth and income funds, you'll pay capital gains tax on any increase in value when you sell your units. The gain may be within your tax-free capital gains allowance, currently £6,000 for the 2023/2024 tax year.
You’re also subject to income tax on any interest and dividends you receive. Everyone gets a tax-free dividend allowance – currently £1,000 for the 2023/2024 tax year.
You get a personal savings allowance; how much you get depends on your income. Most people get a personal savings allowance of £1,000 to earn interest tax free.
Tax benefits depend on individual circumstances and are subject to change. For the most up to date information, visit gov.uk.