Investing For Growth Vs. Investing For Income: The What, Why, When & How
TABLE OF CONTENTS
No two investors are alike. Investments are highly personal products, and there is no one-size-fits-all approach that works for everybody. There are many factors that affect the kind of investments that work for you, specifically. And here are some of the influencers.
- Your short-term goals
- Your long-term goals
- Your risk tolerance
- Your risk appetite
- Your risk capacity
- Your income levels
- Your investment budget
Broadly speaking, however, there are two kinds of investing. Some people invest for growth. And others, for income. What are these approaches though? Which one works for you? And how do you go about investing for growth or income, as the case may be? In this blog, we'll answer all of these questions for you.
And as always, let's begin at the basics.
What is investing for growth vs. investing for income?
To understand the differences between investing for growth and investing for income, you need to first understand what they are all about.
Growth investing is a kind of investment strategy that helps your funds grow over time. The value of your initial investment grows over time, so you can build an investment corpus that can help you meet your life goals. The pace of growth varies across different investment options.
Income investing, on the other hand, is exactly what it sounds like. It aims to create cash flow for you, so you can rely on the steady inflow of funds for income. Investments that give you periodical financial payouts can be used as a primary or an additional source of income. These payouts can be in the form of interest, dividends, or even annuity payments.
Why choose investing for growth or investing for income?
The basic objectives of growth investing and income investing are quite different. Understanding why each kind of investing is important can help you identify which one you should prioritize.
Growth investing is important for the following reasons:
- It helps you build a significant corpus over the long term.
- You can rely on your corpus to pay for major life goals, like that down payment on your home loan or your children's college expenses.
- You can also take care of your retirement through growth investing.
- Above all, growth investing helps you leave an inheritance.
Income investing, on the other hand, gives you the following benefits.
- It can supplement your primary income during your working years.
- It gives you guaranteed payouts without increasing your investment risk too much.
- Income investing can even replace your primary income in case of an unexpected job loss.
- It gives you a reliable stream of income during the retirement phase of life.
When to choose investing for growth and investing for income?
Is there a right to choose growth investing over income investing, or vice versa? Well, the ideal approach would be having both these strategies in place, so you can build your initial investment amount over the years and also simultaneously set up a secondary source of income.
That said, there are some conditions that may be more favorable for growth investing, and others that may indicate income investing could be a better option. Let's take a look at when growth investing and income investing generally work.
Here's when you need to adopt the growth investing strategy.
- You are younger and have a long-term investment horizon ahead of you.
- You have a higher risk appetite and can afford to take on higher investment risks.
- You want to build a significant corpus for different life goals.
- You want your initial investments to multiply significantly over time.
And here's when you need to adopt the income investing strategy.
- Your current primary income is not enough for your needs.
- You have a more conservative approach to investing and prefer guaranteed benefits with low risk.
- You are planning for a short-term investment horizon.
- You are fast approaching retirement and wish to secure a source of income to replace your primary income.
How to go about investing for growth and investing for income?
So, once you have decided which approach to adopt—or if you've decided to commit to both growth investing and income investing—you need to know how you can implement this decision practically. To be more specific, you need to know how to invest for growth or income. Let's see how.
Here are some ways in which you can get started with growth investing.
- Direct equity
Direct equity has often been known to offer inflation-beating returns over the long term. Growth stocks, in particular, come with great potential to multiply your initial investment.
- Mutual funds
If direct equity investments sound too complicated for you, mutual funds can help you invest in equity easily. You have a variety of growth-oriented funds to choose from, based on your goals and risk profile.
- Real estate
Real estate is another category of investment that could help you enjoy inflation-beating gains. Also, like most growth investment options, real estate is also a long-term investment option.
In addition to offering a life cover, ULIPs or Unit-Linked Insurance Plans allow you to invest in a variety of funds like equity, debt, balanced funds and more. You can choose a mix of funds based on your risk profile and open up the opportunity to earn market-linked returns.
If investing for income is your priority, here are some tried and tested options that work.
- Dividend stocks
Dividend stocks are stocks of those companies that regularly pay out dividends annually, semi-annually or quarterly. By building a portfolio of such stocks, you can set up a source of steady income to supplement your main income.
Bonds are fixed income securities that pay out interest at periodic intervals. You can choose to invest in government bonds if you are more conservative, or in corporate bonds if you are willing to take on higher risks.
- Fixed deposits
Fixed deposits offer an interest payout option that you can choose if you want extra income. The income payouts are generally made on a monthly basis, at the rate of interest fixed by the bank or non-banking financial institution you open an FD with.
- Income plans
Income plans are essentially insurance plans that give you the benefit of guaranteed income payouts in addition to a life cover. These payouts are made for a specific period.
That sums up the key differences between growth investing and income investing. Both growth and income are important goals to pursue, and as an investor it is advisable to balance the two efficiently. That way, you are sufficiently prepared for every major and minor life goal on your list.
Read next: 5 WAYS TO GENERATE EXTRA INCOME
If you are looking for investments that can help you set up an additional source of income, there are many investment options that you can rely on. We have a blog that tells you about 5 easy ways to generate extra income.
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