The return on any investment is the sum of all money you made from all sources related to that investment. Those returns can be broken down into different sources, depending on the nature of the investment we are considering. There is a set of terminology that surrounds these components that can be confusing. Since our ultimate focus for long-term investing will be mutual funds, let’s consider the major elements of those.
Obviously, when we buy a fund, we plan to make money. We can do this with either income or growth. Income refers to money that the investment makes because of its nature. Income includes things like dividends, interest payments, and rents. Growth, on the other hand, means the face value of your investment has gone up, and you have made a paper gain. Paper gains are potential unrealized profits that you don’t really have until you sell the investment and realize the profit. Note that market forces can cause extreme changes in both income and growth. Yield refers to dividends or interest, which can be larger or smaller than expected for some investments.
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