What Is a Growth Fund?
A growth fund is a diversified portfolio of stocks that has capital appreciation as its primary goal, with little or no dividend payouts. The portfolio mainly consists of companies with above-average growth that reinvest their earnings into expansion, acquisitions, or research and development(R&D). Most growth funds offer higher potential capital appreciation but usually at above-average risk.
Key Takeaways
- A growth fund is a mutual fund or exchange-traded fund (ETF) that includes companies primed for revenue or earnings growth at a pace that is faster than that of either industry peers or the market overall.
- Growth funds are separated by market capitalization into small-, mid-, and large-cap.
- Most growth funds are high-risk, high-reward, and are therefore best suited to market participants with a long-term investment horizon and a healthy risk tolerance.
How a Growth Fund Works
The high-risk, high-reward mantra of growth funds can make them ideal for those not retiring anytime soon. Typically, investors need a tolerance for risk and a holding period with a time horizon of five to ten years. Growth fund holdings often have high price-to-earnings (P/E) and price-to-sales (P/S) multiples. This trade-off from investors is the above-average revenue and earnings gains these companies produce.
Types of Growth Funds
Growth funds, along with value funds and blend funds, are one of the main types of mutual funds and exchange traded funds (ETFs) They are more volatile than funds in the value and blend categories. Growth funds are typically split by market capitalization, with funds representing small-cap, mid-cap, and large-cap groupings.
Large-cap growth mutual funds are one of the largest types of mutual funds in terms of market share. Large-blend funds, which offer investors value and growth, are also very popular. Foreign large-cap growth funds are much lower in terms of market share.
Foreign growth funds are becoming more common for investors who want to take advantage of global growth. These funds invest in international stocks posting strong revenue and earnings growth. For international growth funds, technology and consumer sectors are the most common. Large internet names such as Tencent (TCTZF), Baidu (BIDU), and Alibaba (BABA) can be found among the top ten holdings for many international growth funds.
Largest Growth Fund
One of the largest growth funds is the Growth Fund of America (AGTHX) from American Funds. This mutual fund has over $253billion in assets under management (AUM) as of March 2022 and the stock price is up 10% over the last year, despite the market volatility. The fund's average annual return has been 14.28% over the last ten years, as of Feb. 28, 2022.
The Growth Fund of America has Tesla, as its largest holding, representing 7.1% of assets. Technology stocks represent the largest sector weighting at 34.9%. Consumer Discretionary stocks follow closely behind with 24.3% of assets.
Technology stocks are a major part of growth funds. With high growth and high P/E and P/S ratios, technology stocks fit the criteria perfectly for growth funds.
Performance of Growth Funds
The majority of the best performing large-company stock funds over the last decade have been growth funds. For example, the Morgan Stanley Multi Cap Growth A (CPOAX) is the best performing large-company stock fund over the last ten years, with an annualized return of 23.3%. Currently, its top three holdings include Snowflake, Inc. (SNOW), Cloudflare, Inc. (NET), and The Trade Desk (TTD).
FAQs
Growth funds fall within three general categories of market capitalization: small-cap (invests in companies with market caps up to $1 billion); mid-cap (invests in companies with market caps of $1 billion to $5 billion), and large-cap (invests in companies with market caps of more than $5 billion).
What is the definition of a growth fund? ›
A growth fund is a mutual fund or exchange-traded fund (ETF) that includes companies primed for revenue or earnings growth at a pace that is faster than that of either industry peers or the market overall.
What are the 4 types of mutual funds? ›
Most mutual funds fall into one of four main categories – money market funds, bond funds, stock funds, and target date funds. Each type has different features, risks, and rewards.
What are the 4 funds Dave Ramsey recommends? ›
And to go one step further, we recommend dividing your mutual fund investments equally between four types of funds: growth and income, growth, aggressive growth, and international.
How do you identify a growth fund? ›
A growth fund is a mutual fund or exchange-traded fund (ETF) that's made up entirely of growth stocks. These are stocks that are gaining at faster-than-average rates and are expected to continue to do so into the future.
What type of fund is a growth fund? ›
A growth fund is a mutual fund that includes companies primed for revenue or earnings growth faster than that of their industry peers or the overall market. Growth funds are divided into small-, mid-, and large-cap markets.
Is growth fund high risk? ›
Investments in growth funds have a high degree of risk. Because of this, you should only pick growth funds if you are willing to take a high degree of risk. Thus, it has the potential to bring in a lot of money. If you're nearing retirement, it's best to avoid these investments.
What is the benefit of a growth fund? ›
Benefits of Investing in a Growth Fund
It's about seeing your investment grow substantially over time. Diversification is another big plus. By being invested across different sectors and companies, Growth Funds can help reduce the risk of putting all your money in one type of investment.
What are the best growth funds? ›
7 of the Best Growth Funds to Buy and Hold
| Fund | Expense ratio |
|---|
| SPDR Portfolio S&P 500 Growth ETF (SPYG) | 0.04% |
| iShares Russell 1000 Growth ETF (IWF) | 0.19% |
| Schwab U.S. Large-Cap Growth ETF (SCHG) | 0.04% |
| Invesco S&P 500 GARP ETF (SPGP) | 0.34% |
3 more rowsApr 2, 2024
Income investments pay out dividends or interest to the investor based on a set schedule. Growth investments focus on growing the original investment. + read full definition as much as possible — usually through compound interest over time. There are also investments that provide both growth and income.
Types of Mutual Funds
- Equity Funds. Equity Funds (Stocks): Equity Funds invest in shares of companies. ...
- Debt Funds. Debt Funds (Bonds): Debt Funds invest in bonds, providing a steady income. ...
- Money Market Funds. ...
- Hybrid Funds.
There are four broad types of mutual funds: Equity (stocks), fixed-income (bonds), money market funds (short-term debt), or both stocks and bonds (balanced or hybrid funds).
What is the 1234 financial rule? ›
One simple rule of thumb I tend to adopt is going by the 4-3-2-1 ratios to budgeting. This ratio allocates 40% of your income towards expenses, 30% towards housing, 20% towards savings and investments and 10% towards insurance.
What is the 4% financial rule? ›
The 4% rule limits annual withdrawals from your retirement accounts to 4% of the total balance in your first year of retirement. That means if you retire with $1 million saved, you'd take out $40,000. According to the rule, this amount is safe enough that you won't risk running out of money during a 30-year retirement.
What is an aggressive growth fund? ›
An aggressive growth fund is a mutual fund that seeks capital gains by investing in the shares of growth company stocks. Investments held in these funds are companies that demonstrate high growth potential, but also carry greater risk.
What is the 3 fund strategy? ›
The three-fund portfolio consists of a total stock market index fund, a total international stock index fund, and a total bond market fund. Asset allocation between those three funds is up to the investor based on their age and risk tolerance.
What are the different types of growth in finance? ›
There are two major types of growth rates known as internal and sustainable. The maximum level of growth a company can make using their own money, usually from sales, is known as the internal growth rate. The sustainable growth rate is the highest growth a company can maintain without borrowing more money.
What is an example of a growth fund? ›
For example, if the average tech stock is currently growing at an expected earnings per share of 4% over the next five years, a tech company expected to grow at an 8% rate over the same period would be considered for inclusion in a growth fund.
