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, and/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

This high-risk, high-reward mantra makes growth funds ideal for those not retiring anytime soon. Investors need a tolerance for risk and a holding period with a time horizon of five to 10 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. 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 10 holdings for many international growth funds.

Largest Growth Fund

As of November 2020, one of the largest growth funds is the Growth Fund of America (AGTHX) from American Funds. This mutual fund has $225 billion in assets under management (AUM), as of November 2020, and up 17.6% over the last year, even with all the stock market volatility. The fund's average annual return is 13.26% over the last 10 years.

The Growth Fund of America has Facebook (FB) as its largest holding, representing 5.8% of assets. Technology stocks represent the largest sector weighting at 23.2%. Consumer Discretionary stocks follow closely behind with 20% 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

With a bull market that has lasted over a decade, growth stocks have been on a tear, lifting the returns of growth funds compared to their value and income kindred. 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 10 years with an annualized return of nearly 23%. Currently, it's top three holdings include Zoom (ZM), Square (SQ), and Spotify (SPOT).