Growth Funds: Worthy Investment Or Risky Business?

Growth funds are diversified portfolios of stocks that aim for capital appreciation as their main goal, with little to no dividend payouts. These funds primarily consist of companies with above-average growth that reinvest their earnings into expansion, acquisitions, or research and development. While growth funds offer potentially higher returns, they usually come with higher risks. Therefore, they are more suitable for investors with a long-term investment horizon and a higher risk tolerance.

Growth funds are typically split into small-cap, mid-cap, and large-cap groupings based on market capitalization. Large-cap growth funds are one of the largest types of mutual funds in terms of market share. Foreign growth funds are also becoming more common, allowing investors to take advantage of global growth opportunities.

When considering whether to invest in a growth fund, it's important to evaluate your investment goals, risk tolerance, and time horizon. Growth funds may be suitable for those seeking capital appreciation and willing to take on higher risks, while value funds or blended funds may be more appropriate for those with a lower risk tolerance or a shorter investment timeframe.

Growth funds: high-risk, high-reward

Growth funds are a type of investment fund that focuses on capital appreciation by investing in companies with strong growth potential. These funds typically have a diversified portfolio of stocks in companies that are expected to grow faster than their peers or the overall market. While growth funds offer the potential for high returns, they also come with a higher level of risk.

Growth funds are typically made up of stocks in companies that reinvest their earnings into expansion, acquisitions, or research and development. These companies often have high price-to-earnings (P/E) and price-to-sales (P/S) multiples, reflecting their strong growth potential. Growth funds are usually separated by market capitalization into small-, mid-, and large-cap funds.

Who are growth funds suitable for?

Growth funds are generally suitable for investors with a long-term investment horizon and a healthy risk tolerance. These funds can be ideal for those who are not retiring anytime soon and are willing to hold their investments for five to ten years.

Types of growth funds

Large-cap growth mutual funds are one of the largest types of growth funds in terms of market share. These funds invest in large companies with a market capitalization in the top 70% of the U.S. equity market. Large-blend funds, which offer both value and growth, are also popular. Foreign large-cap growth funds have a smaller market share but are becoming more common as investors seek to take advantage of global growth opportunities.

Examples of growth funds

One of the largest growth funds is the Growth Fund of America (AGTHX) from American Funds, with over $253 billion in assets under management as of March 2022. Other examples of growth funds include the Vanguard Growth ETF (VUG) and the Fidelity Blue Chip Growth Fund (FBGRX).

Performance of growth funds

Growth funds have outperformed value funds over the last decade. 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%.

Growth funds offer investors the potential for high returns by investing in companies with strong growth prospects. However, these funds also come with a higher level of risk. As such, growth funds are best suited for investors with a long-term investment horizon and a high risk tolerance.

Growth vs value investing

Growth and value investing are two schools of investing that take different approaches to maximising value for investors.

Growth Investing

Growth investors are attracted to companies that are expected to grow faster in terms of revenues, cash flows, and profits than the rest. As growth is the priority, these companies reinvest earnings into themselves in the form of new workers, equipment, and acquisitions.

Growth investors prefer capital appreciation—sustained growth in the market value of their investments—rather than the steady dividend streams sought by income investors.

Growth stocks are considered to be overvalued, priced higher than the broader market, and are therefore riskier. They are expensive because investors expect big things, and if growth plans don't materialise, the price could plummet. They also experience greater stock price swings, so they may be better suited to risk-tolerant investors with a longer time horizon.

Value Investing

Value investing is about finding companies whose stock prices don't necessarily reflect their fundamental worth. Value investors seek out businesses trading at a share price that is considered a bargain. Over time, the market will recognise the company's value and the price will rise.

Value funds don't emphasise growth above all else, so even if the stock doesn't appreciate, investors typically benefit from dividend payments. Value stocks have more limited upside potential and can, therefore, be safer investments than growth stocks.

Value stocks are considered undervalued, priced lower than the broader market, and are relatively stable with low volatility and high dividend yields.

Recent Performance

Over the last decade, growth stocks have outperformed their value counterparts due to favourable economic tailwinds and low interest rates. However, historically, value investing has outperformed growth investing over the long term.

Blended Approach

There is no need to exclusively pursue either growth or value investing. A blended approach involves buying companies that fall into both value and growth categories, and can be as easy as investing in an S&P 500 index fund.

Over the long term, a blended approach can often outperform an investor who switches between growth and value in an attempt to time the market.

Growth funds and diversification

Growth funds are a type of investment vehicle that focuses on companies with strong growth potential. These companies are expected to grow faster than their peers in terms of revenues, cash flows, and profits. As a result, they tend to be more attractive to investors who are willing to take on more risk in exchange for higher upside potential.

Diversification, on the other hand, is a risk management strategy that involves spreading investments across various asset classes, sectors, and geographies. It is based on the idea of not putting "all your eggs in one basket". By diversifying their portfolios, investors aim to reduce the impact of market volatility and potential losses.

When it comes to growth funds and diversification, it is essential to understand the relationship between the two concepts. Growth funds can be a part of a diversified portfolio, but they should not be the only investment vehicle. Investors should also consider other types of funds, such as value funds, which focus on companies with strong fundamentals but may have less aggressive growth strategies.

To achieve effective diversification, investors should consider the following:

• Asset Allocation: Determine the percentage of your portfolio that will be allocated to different asset classes, such as stocks, bonds, cash, and alternative investments. The allocation will depend on your risk tolerance, investment horizon, and financial goals.
• Geographic Diversification: Invest in companies from different countries and regions, including domestic and international markets, to reduce the impact of country-specific or regional economic events.
• Sector Diversification: Spread your investments across various industries, such as technology, healthcare, energy, and financials. This helps to reduce the risk associated with any one industry or sector.
• Company Size: Include a mix of small, medium, and large companies in your portfolio. Smaller companies may offer higher growth potential but also carry greater risk, while larger companies may be more stable and established.
• Mutual Funds and ETFs: These investment vehicles provide an easy way to achieve diversification, as they typically hold a diverse range of underlying assets. However, it is important to ensure that the funds themselves are also diversified and do not overlap significantly with your other holdings.

In conclusion, growth funds can be a valuable part of a well-diversified portfolio. By combining growth funds with other types of investments and considering the different dimensions of diversification, investors can aim to maximize their returns while managing their risk exposure. Diversification does not guarantee profits or protect against all losses, but it can help smooth out market volatility and provide more consistent returns over time.

Growth funds: long-term investment horizon

Growth funds are diversified portfolios of stocks that have capital appreciation as their primary goal, with little to no dividend payouts. They are best suited to investors with a long-term investment horizon and a healthy risk tolerance.

Growth funds are made up of companies with above-average growth that reinvest their earnings into expansion, acquisitions, or research and development. They are typically separated by market capitalization into small-, mid-, and large-cap funds. Large-cap growth funds are one of the largest types of mutual funds in terms of market share.

Growth funds are high-risk, high-reward investments. They are ideal for investors with 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.

Growth funds are highly attractive to investors as they can provide impressive returns, but they are also untried and can pose a high risk. They are often made up of smaller, younger companies poised to expand and increase profitability.

Growth investors tend to look for five key factors when evaluating stocks:

• Historical and future earnings growth
• Profit margins
• Returns on equity (ROE)
• Share price performance
• Strong stock performance

Growth funds have outperformed their value counterparts over the last decade due to favourable economic conditions.

Growth funds: capital appreciation

Growth funds are diversified portfolios of stocks that have capital appreciation as their primary goal, with little to no dividend payouts. They are best suited for investors with a high-risk tolerance seeking capital appreciation. These funds are made up of companies with above-average growth that reinvest their earnings into expansion, acquisitions, or research and development.

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. They are 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 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.

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.

Growth funds are a good option for investors seeking capital appreciation. They are best suited for investors with a high-risk tolerance and a long-term investment horizon.

Frequently asked questions