A growth fund is a diversified portfolio of stocks with capital price appreciation as their prime objectives. Stocks in Growth funds do not pay dividends or pay little if any. They emphasize reinvesting profits into business development and growth.
Value funds, mutual funds, and ETFs are prime examples of growth funds. These funds provide high-growth but high-risk investment strategies to investors.
Deeper Definition
Growth funds are diverse stock portfolios that aim to achieve capital appreciation without or little dividend payments if any.
They comprise individual stocks that outperform market growth averages. Often these stocks are young, aspiring, and tech-savvy companies that perform better than others. The portfolio of stocks is a careful selection of high-growth companies that consistently reinvest their revenues into their business operations.
They have a curated list of growth stocks. These stocks have a proven track record of performance. Some of these funds include young and aspiring stocks with bright prospects. Most of these companies have above-average price to earnings and price to sales ratios than industry averages.
How Does It Work?
Growth Funds are managed by experienced financial advisors. They aim to combine individual stocks into a diversified portfolio. Diversification allows for risk hedging as well as a potential growth strategy. The investor in this type of portfolio seeks cumulative growth from chosen stocks.
Mutual Funds and ETFs are prime examples of growth funds. These funds comprise stocks that heavily reinvest in their research and development. Most of these stocks do not pay dividends as well. These stocks are more volatile than the market average but equally rewarding. The high-risk, high-reward formula is the best description of these fund stocks.
A Growth Fund’s holding can be categorized on a market capitalization basis as well. Holdings are split into large, mid, or small-cap groups. These funds choose these stocks on their potential growing indicators. For instance, if a large-Cap holding is performing at an average of 7% growth rate, we can consider another company with an average of 10% growth rate as a growth stock.
From investors’ perspective, these funds provide high-growth incentives. As these funds carry a high degree of risk, investors need to carry higher risk tolerance than normal. Also, investors need to adopt a long-term investment strategy to maximize their capital gains. Investors can expect to yield capital gains with better results for five to ten years of the investment holding period which is also called the holding period return.
Special Considerations with Growth Funds
These funds carry high risk than average and higher rewards. These funds are managed by expert advisors. It also means these funds incur higher management costs. Investors should also consider capital gains taxes on these investments.
Investors look for certain performance indicators when choosing growth stocks. These funds minimize the efforts for investors by carefully selecting growing stocks under the umbrella.
Here are a few key performance indicators for growth stocks that are included in growth funds:
- Historical Earnings of the Stocks – Proven track record of high earnings with key ratios such as P/E, EPS, and ROE, etc.
- Future Performance and earning indicators.
- An eye on the company profit margins and cash management.
- A strong ROE for profit and revenue measurement of the company.
- Stock Growth Rate – with historical performance indicators as well as future indicators. A growth stock with at least a 15% growth rate can double in the next five years.
Example
There are several growth funds that have consistently outperformed the market growth averages. For instance, the growth fund of America is one the largest growth funds in the world.
Some of the top performing growth funds with five- or ten-years growth performance records are:
- Morgan Stanely Multi-Cap Growth Fund – CPOAX
- Ridge Worth Aggressive Fund – SAGAX
- Fidelity Advisor Growth – FAGAX
- T-Rowe Price New Horizons – PRNHX
Advantages
Investing in growth funds can provide several benefits to investors seeking capital gains over the long term.
- Portfolio diversification is the prime advantage of investing in these funds as most of these funds are naturally diversified.
- They offer high-risk high-return investment strategies for investors with higher risk appetite and risk tolerance.
- These funds are actively managed funds by experts.
- These funds can be used as a hedge against economic slump as these funds have historically performed well in economic downturns as well.
Disadvantages
There are some risks and limitations of investing in growth funds as well:
- The funds are volatile to market trends in the short term.
- These funds are riskier and can potentially result in the loss of investment.
- They incur higher capital gain taxes.
- They are not suited for investors looking for consistent income through dividends.
Conclusion
Growth funds are diversified portfolios of growth stocks. These funds offer high-risk high reward investment strategies to investors. These are actively managed funds with above market average growth performance.
