A growth fund is a diversified portfolio designed primarily for capital appreciation, consisting of stocks from companies that reinvest their earnings into expansion, acquisitions, or research and development (R&D) rather than providing dividend payouts. These companies are characterized by above-average growth prospects, offering investors higher potential returns in exchange for assumative risk.
Key Takeaways
- Primed for Growth: A growth fund is a mutual fund or exchange-traded fund (ETF) that includes companies poised for rapid revenue or earnings growth, outpacing industry peers or the market overall.
- Market Capitalization Variance: Growth funds are classified by market capitalization into small-, mid-, and large-cap categories.
- High Risk, High Reward: Growth funds generally come with above-average risks but promise considerable returns, making them suitable for long-term investors with a robust risk tolerance.
Understanding the Dynamics of a Growth Fund
The high-risk, high-reward nature of growth funds makes them optimal for investors enduring long investment horizons, typically stretching five to ten years. Investors must be tolerant of risk and patient with the investment holding period. Holdings in growth funds often exhibit high price-to-earnings (P/E) and price-to-sales (P/S) ratios, a trade-off for the expected significant revenue and earnings expansion these firms are anticipated to achieve.
Types of Growth Funds
Growth funds, including value and blend funds, are a principal category within mutual funds and exchange-traded funds (ETFs). Growth funds are notorious for their volatility compared to value and blend funds. They are categorized by market capitalization – small-cap, mid-cap, and large-cap.
Large-cap growth mutual funds dominate in terms of market share, followed by large-blend funds that offer a mix of value and growth. Foreign large-cap growth funds have a smaller market share but are gaining traction among investors tapping into global growth.
International growth funds invest in international stocks showing robust revenue and earnings growth. Technology and consumer sectors frequently constitute the largest holdings in these funds, with significant players like Tencent, Baidu, and Alibaba leading many portfolios.
The Titans of Growth Funds
Among the largest growth funds is the Growth Fund of America (AGTHX) from American Funds. As of March 2022, this mutual fund manages over $253 billion in assets, with a stock price up 10% over the preceding year despite market volatility. Its top holding, Tesla, comprises 7.1% of assets, and technology stocks represent the largest sector weighting at 34.9%, followed by consumer discretionary stocks at 24.3%.
Outstanding Performance of Growth Funds
Many of the top-performing large-company stock funds over the past decade have been growth funds. For instance, Morgan Stanley Multi Cap Growth A (CPOAX) leads the pack, with an impressive 10-year annualized return of 23.3%. Its top holdings include Snowflake, Inc., Cloudflare, Inc., and The Trade Desk.
Investing in growth funds demands a strategic approach, acknowledging the elevated risks but tempered by the potentially superior returns, particularly for investors committed to a long-term horizon.
Related Terms: capital appreciation, high-return stocks, growth investing, mutual funds, ETFs.
References
- Capital Group. “The Growth Fund of America (AGTHX)”.
- Morgan Stanley. “Insight Fund (CPOAX)”.
