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 are divided into small-, mid-, and large-cap categories. Most growth funds are considered high risk and are best suited for individuals with a long-term investment horizon and healthy risk tolerance. Remember, however, that all investments involve risk, and risks include a loss of principal.
What is the definition of 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).
What is a growth fund quizlet? ›
Growth funds invest in the common stocks of companies in rapidly expanding industries, such as technology and bioengineering.
What is the definition for a type of growth investment? ›
Growth investing is an investment style and strategy that is focused on increasing an investor's capital. Growth investors typically invest in growth stocks—that is, young or small companies whose earnings are expected to increase at an above-average rate compared to their industry sector or the overall market.
What are the 4 basic types of growth? ›
The four types of human development are physical, behavioral, emotional and intellectual. All four are affected by nature, as well as nurture.
What are the three types of growth? ›
The growth functions to be examined are linear, exponential, and logistic growth models. Each type of model will be used when data behaves in a specific way and for different types of scenarios. Data that grows by the same amount in each iteration uses a different model than data that increases by a percentage.
How do you identify a growth fund? ›
Key Takeaways
- Growth fund is an ETF (Exchange Traded Fund) or mutual fund that comprises of companies whose revenue is growing faster than other companies in the same industry.
- These funds are usually categorised into small, mid and large-cap funds.
What is your risk tolerance? If you're more risk-averse, reinvesting dividends might be preferable since this strategy tends to be more stable and offers (some) predictability. If you are willing to trade having more risk for the possibility of higher returns, investing in growth funds will be more appealing.
Is a growth fund a good investment? ›
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 an example of a growth fund? ›
For example, a few funds on the list, such as Loomis Sayles Growth, have compact portfolios consisting of 50 or so securities, while many of the index funds and ETFs on the list own hundreds of stocks. Some growth funds focus on stocks from large companies, while others focus on stocks of midsize or smaller firms.
Calculating a growth rate is simply achieved by dividing the difference in value observed over some period (such as a year) by the starting value. Yahoo Finance.
What is a growth vs venture fund? ›
Venture capital-backed startups are often acquired by larger companies looking to integrate innovative technologies or business models. Growth equity investments, in contrast, target established businesses that can attract strategic buyers seeking to enhance their market presence or capabilities.
What is value vs growth performance? ›
Growth stocks tend to be more volatile than other types of companies, with share price fluctuations. Investors buy growth stocks to earn profits from rapid price appreciation, rather than income from dividends. Value stocks remain steady through all sorts of market conditions and take time to gain in price.
What is growth investing in simple terms? ›
Growth investing is essentially the process of investing in companies, industries, or sectors that are currently growing and are expected to continue their expansion over a substantial period of time.
What is the difference between growth fund and value fund? ›
Value funds give you steady returns over a longer period of time, while growth funds could give higher returns both in the long-term and short-term.
What are the three main types of funding? ›
The different sources of funding include: Retained earnings. Debt capital. Equity capital.
What are the three major types of funds? ›
The Generally Accepted Accounting Principles (GAAP) basis classification divides funds into three fund categories: governmental, proprietary, and fiduciary. The GAAP basis classification assigned to a fund impacts how the fund is displayed in the Annual Comprehensive Financial Report.
What are the three major growth strategies? ›
Initiate a process to identify strategies with a high probability for success. Three customer growth strategies are presented below: (1) Growing the core business, (2) Growing by sub-segmenting customers and (3) Growing adjacent opportunities.
What are the three main methods of growth? ›
Methods of growth
- - Organic/Internally – by its own means. ...
- - Inorganic/Externally – involving another business via a takeover or a merger or joint venture.
- Horizontal Integration is when one firm merges with or takes over another one in the same industry at the same stage of production.
