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.
- 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, with large-cap the biggest class of funds, with a nearly 10% market share.
- 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.
Growth Fund Explained
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 and price-to-sales multiples. This trade-off from investors is the above-average revenue and earnings gains these companies produce.
Main Type of Mutual Fund
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 funds are the biggest class of growth funds with a 9.9% market share and $2.2 trillion in assets. This trails only large-blend funds, which offer investors value and growth. Large-blend funds have a 15.9% market share. Foreign large-cap growth funds rank 11th of all mutual fund classes with a 2.3% 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, Baidu, and Alibaba can be found among the top 10 holdings for many international growth funds.
The Largest Growth Fund
As of 2020, the largest growth fund is the Growth Fund of America from American Funds. This mutual fund has $146 billion in assets under management (AUM) and is up 10% year-to-date, even with all the stock market volatility. It continues to perform well with an average gain of 12.6% annually over the last 10 years.
The Growth Fund of America has Facebook as its largest holding, representing 5.6% of assets. Technology stocks represent the largest sector weighting at 20.5%. Communication Services stocks follow closely behind with 18.8% of assets.
Technology stocks are a major part of growth funds. With high growth and high price-to-earnings and price-to-sales valuations, technology stocks fit the criteria perfectly for growth funds.
Performance of Growth Funds
With the bull market of the past decade, growth stocks have been on a tear, lifting the returns of growth funds compared to their value and income kindred. Large growth U.S. equity funds have returned 13.5% annualized for the past five years, making them one of the best-performing types of asset classes. By contrast, large value U.S. equity funds, which invest in slower-growing, low-priced stocks, appreciated 9.5% for the same period, and high-yield bonds offered only 3.34%.