What Is a Growth Fund?
Let me explain what a growth fund is. It's a type of mutual fund or exchange-traded fund (ETF) that invests in companies expected to grow at an above-average rate.
As a growth fund, it's a diversified portfolio of stocks with capital appreciation as the primary goal, offering little or no dividend payouts. The holdings mainly include companies with above-average growth that reinvest their earnings into expansion, acquisitions, or research and development (R&D). You'll find that most growth funds provide higher potential capital appreciation, but they come with above-average risk.
Key Takeaways
- A growth fund is a mutual fund or ETF that includes companies primed for revenue or earnings growth faster than 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 best suited to investors with a long-term horizon and healthy risk tolerance.
How a Growth Fund Works
Understand that the high-risk, high-reward nature of growth funds makes them suitable for those not retiring soon. You typically need a tolerance for risk and a holding period of five to ten years. These funds' holdings often have high price-to-earnings (P/E) and price-to-sales (P/S) multiples. In exchange, investors get above-average revenue and earnings gains from these companies.
Types of Growth Funds
Growth funds, along with value and blend funds, are one of the main types of mutual funds and ETFs. They are more volatile than value or blend funds. You'll see them split by market capitalization into small-cap, mid-cap, and large-cap groupings.
Large-cap growth mutual funds hold one of the largest market shares among mutual funds. Large-blend funds, mixing value and growth, are also popular. Foreign large-cap growth funds have a smaller market share.
Foreign growth funds are increasingly common for investors seeking global opportunities. These invest in international stocks with strong revenue and earnings growth. For them, technology and consumer sectors are most common. You'll often find large internet names like Tencent (TCTZF), Baidu (BIDU), and Alibaba (BABA) in the top ten holdings of many international growth funds.
Largest Growth Fund
One of the largest is the Growth Fund of America (AGTHX) from American Funds. It has over $253 billion in assets under management (AUM) as of March 2022, with the stock price up 10% over the last year despite market volatility. The fund's average annual return has been 14.28% over the last ten years, as of Feb. 28, 2022.
This fund has Tesla as its largest holding, at 7.1% of assets. Technology stocks represent the biggest sector weighting at 34.9%, followed by Consumer Discretionary at 24.3%.
Important Note on Technology Stocks
Technology stocks form a major part of growth funds. With their high growth and high P/E and P/S ratios, they fit the growth fund criteria perfectly.
Performance of Growth Funds
Most of the best-performing large-company stock funds over the last decade are growth funds. For instance, the Morgan Stanley Multi Cap Growth A (CPOAX) is the top performer among large-company stock funds over ten years, with an annualized return of 23.3%. Its current top three holdings include Snowflake, Inc. (SNOW), Cloudflare, Inc. (NET), and The Trade Desk (TTD).
