Capital Appreciation Fund vs Income Fund

A capital appreciation fund aims for long-term wealth building with little reward in the short term. An income fund, though, provides more regular dividend payments to the individual invested in the fund. Most mutual funds pay out income and capital gains nearly immediately. It is rarer to be involved in a capital appreciation fund. However, there are several scenarios in which an appreciation fund is preferable.

Retirement Savings Funds

Saving for retirement is most effective when all earnings are returned directly to the fund. For this purpose, a capital appreciation fund is a better option. Further, with a retirement account, you are not allowed to collect profits on the fund in the short term prior to the minimum qualifying age of 59 1/2. Any income paid out must stay in your retirement account or be subject to standard income tax plus a ten percent early withdrawal fee. It makes good sense to use your retirement savings toward a greater profit in the future instead of living off those savings today. If you collect income on the gains, there will be no growth in the fund to provide for a safe retirement when you need it most.

Nest-Egg Funds

If you are looking to invest in a fund at a young age that will serve as your nest egg for the future, a capital gains fund is a better option. This is particularly true for parents that are placing investments into a fund in the name of a child. This can provide for a college education, a trust fund gift or even a down payment on a home sometime down the line. Spending gains in the short run is counter-intuitive to the goal of this fund. Unfortunately, since there is no tax deferment or exemption on this type of fund, you will have to pay capital gains taxes on the growth each year.

Supplemental Income Funds

If you are entering into an expensive time in your life, a supplemental income through your investments can be extremely helpful. This additional income can help cover your property tax or unexpected expenses or even send your family on a vacation every year. A great time to invest in an income fund is before going back to school for a second degree. You can use some of the money you have already saved from your career, keep the funds for the future and still have some gains to help cover costs in the meantime. 

Excess Savings Investments

You may be lucky enough to have a salary large enough to save for retirement, emergency expenses and other long-term goals but still have cash left over at the end of the year. Income funds are a great way to put this cash away. Since the money is not actually allocated toward a specific purpose, you can spend it at any point. You can spend the income you earn off the account or even withdraw funds and spend the principal investment. If you are investing in a high growing income fund, though, you can enjoy the extra funds without dipping into the principal. 

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