I have most of my savings in mutual funds. As “insurance” against major stupidity on my part I have all my RRSP (equivalent to IRA south of the border, I think) savings in a managed plan so that the plan manager decides what funds it goes into. However, I have a lot of savings in mutual funds outside of RRSPs (for the simple reason that I max out my allowable RRSP contributions every year) and those I like watching over on my own.
That said, I feel fairly comfortable with equity vs bond, sector vs non-sector, small-cap vs large-cap etc. One thing I have trouble getting straight is, what is the difference in a growth fund vs an income fund, and should I really care about that designation over and above what the returns on the fund have been? By way of example, TD has a “TD Dividend Growth” and a “TD Dividend Income” fund. Up to this last month, the growth fund has shown better returns, although the income fund has done a bit better in the last month. Is there any reason NOT to simply look at those returns and ignore the growth vs income in the names?
Generally, growth funds invest in companies that don’t pay much in dividends but are expected to significantly increase in stock price; income funds invest in companies that pay generous dividends but aren’t expected to appreciate much. Growth funds are for those who can afford the risk of tying up an investment for the long run; income funds are more for risk-averse, short term investment (think, retired person).
I could be wrong here, but if the funds are increasing in value because there are dividends being pad and reinvested, doesn’t that constitue a tax liability? Unlike appreciating funds, which incur no tax liability unless you sell them?
I think that as long as the dividends are staying inside the RRSP, they aren’t taxable. If you try to take income from the fund OUTSIDE the tax shelter, then you get taxed on it.
But if in both cases the proceeds are automatically being reinvested rather than being withdrawn, what is the net difference in what happens with the fund?
Hmm… Hadn’t thought of that - I’ll have to look into that aspect.
(chrisk - I was asking about my mutuals that are already outside of RRSPs, so the RRSP issue doesn’t apply).
When a fund is labelled Dividend Growth and Dividend Income BJ Moose did a good job.
Please don’t confuse a dividend income fund with a pure income fund. Generally the word “Income” alone can indicate a fund invested in interest earning accounts…treasurys, commercial paper and bonds.
Canadjun: the net difference is that in the long run, the growth fund will outperform the income fund - so they say (emphasis on the long run - one has to be able to weather market dips like the one we had this week; which reminds me of another point: stocks owned by income funds usually have less price volatility than the stocks usually held by growth funds). I think income funds are aimed at those folks who want to get their paws on a dividend check every quarter.
That is not necessarily true. If a fund manager decides to sell a portion of the portfolio for cap gains, and there isnt a sale that offets it with capital losses, the fund must distribute the cap gain earnings to shareholders (typically quarterly). This will count as cap gains income for the shareholder. You can see the breakdown in annual reports, short-term cap gains and long-term cap gains for growth funds.
Most shareholders will automatically re-invest the payout (or the fund will have it as the default option) so it does not look like any gains because you have not sold the share of the fund, and your total investment value doesnt change the day of the payout, it can be tax-reportable income.
If you are referring to tax-sheltered accounts like retirement plans (i.e. IRA) that do not incur immediate tax liability, then either dividend payouts or cap gains arent an issue because that is handled at the time of a distribution (retirement or early withdrawal).
