Investing in Growth Funds

A growth fund is a type of mutual fund or exchange-traded fund (ETF) that’s typically invested in growth stocks, i.e., companies that aim to deliver substantial positive cashflow and better-than-average returns. Growth funds are focused on capital appreciation over time.

Growth funds primarily include shares of growth stocks, but can also include bonds or other investments designed specifically with higher returns in mind. Individual growth funds typically focus on small- , mid- , or large-cap stocks (although some might offer a mix).

Unlike some value funds, growth funds rarely pay dividends. Instead, investors make money on the appreciation of the underlying stocks. Since growth mutual funds are considered somewhat riskier investments — with a higher risk of loss along with a potential for bigger gains — holding these funds for the longer term may help mitigate the short-term impact of price volatility.

What Is Growth Investing?

Growth investing is a strategy that focuses on increasing company revenue or investor returns. For this reason, growth investors may invest in younger or smaller companies, when they invest online or through a traditional brokerage, which are said to be in a growth phase, and whose earnings are expected to increase at an above-average rate compared to their industry sector or the overall market.

Growth Companies, Growth Strategies

Growth stocks aren’t always new companies, though. Larger, more established companies can also fall into this category, assuming they are poised for expansion. Big companies could be in a growth phase due any number of factors:

•   Technological advances

•   Shift in strategy

•   Movement into new markets

•   Acquisitions

How much growth can you expect to get from growth stock mutual funds? As with any mutual fund, the performance of these funds depends on their underlying assets and, in the case of actively managed funds, their portfolio managers’ strategies.

There are also growth index funds, which are passively managed. A growth index fund is a growth stock mutual fund that tracks the performance of a particular stock index that’s focused on growth (e.g., the CRSP Large Growth Index or CRSP Small Cap Growth Index).

Growth Fund Performance

To give you an example of how growth funds compare to the domestic equity market as a whole, the U.S. stock market had an average return of 11.6% in the last decade, compounded annually, as of Aug. 1, 2025, according to Yahoo Finance.

For context, here is the performance of five growth mutual funds and ETFs over the last 10 years, data from Morningstar, as of June 30, 2025.

Fund Name	Total Net Assets	10-year avg. annual return
Champlain Mid Cap Fund (CIPMX)	$3.8 billion	11.11%
Champlain Small Company Fund (CIPSX)	$1.7 billion	9.96%
Fidelity Series Large Cap Growth (FHOFX)	$2.1 billion	15.94%*
Loomis Sayles Growth Fund (LSGRX)	$17.7 billion	17.86%
Morgan Stanley Institutional Fund, Inc. Growth Portfolio (MGHRX)	$4.6 billion	5.74%*

Source: Morningstar, as of June 30, 2025
*5-year returns used; inception August 2018 for FHOFX, June 2018 for MGHRX.

Remember that growth investing can be volatile since companies typically take some risks in order to expand. Also, some growth companies can get a lot of media or investor attention, which can contribute to price swings as investors buy and sell shares with the hope of seeing a profit.

Examples of Growth Stocks

Market capitalization — which indicates the number of outstanding shares a company has multiplied by its price per share — is not a specific hallmark or characteristic of growth stocks. Growth stocks can be large-cap corporations, mid-cap, or smaller companies. That said, most growth funds generally tilt toward larger companies.

Large-cap companies can scale their manufacturing to produce more products at cheaper prices, which increases their potential. Plus, big companies tend to reinvest the money they make into research and development, acquisitions, or expansion.

Information technology companies are often the largest holdings in U.S. growth mutual funds, but these funds may also hold healthcare and consumer discretionary stocks as well.

Smaller companies also have a lot of growth potential, as noted above — and some small-cap companies may be in the initial startup phase, which can sometimes generate outsize growth. And many mid-cap companies have been around longer and may have the ability to adapt to new market needs.

Recommended: Value Stocks vs Growth Stocks: Key Differences to Know

Benefits of Investing in Growth Mutual Funds

There are a few good reasons to consider growth stock mutual funds, and portfolio diversification is a consideration here.

It would be expensive for most individual investors when trading stocks to achieve the level of diversification offered by a pooled investment like a growth mutual fund. Investing in a single fund gives investors exposure to a wide range of stocks in different sectors.

Growth funds may also have long-term potential. For instance, growth stocks are more likely to see returns during an economic boom cycle, when many companies are growing and thriving. But shares can also be volatile, which is one of the risks of the sector.

While investors may not be able to count on dividend income from a growth mutual fund, they may still be able to sell the fund for more than what they paid for it, although there are no guarantees.

Downside of Growth Mutual Funds

Like any other investment, there are potential drawbacks to keep in mind with growth stocks and their growth fund counterparts.

While growth stocks can potentially increase in value more quickly than other stocks, this also makes them a potentially risky and more volatile investment. A typical growth stock mutual fund might return 18.0% one year and –6.0% the next. That kind of volatility isn’t for everyone.

In order for a growth stock to keep growing, the company must continue to earn money. This is challenging for any company to maintain over a long period of time. If there’s a recession, if a company has an unforeseen loss, or can’t continue to grow, the value of the stock may go down.

To help manage this risk, investors may choose to hold growth stocks and growth mutual funds for the five to 10 years, so that they can ride out market fluctuations and potentially be more likely to make a profit.

It’s also important to keep in mind that some growth stocks could become overvalued by the market, which might impact a growth fund’s performance. In this scenario, an investor might buy shares in a growth fund, hoping for solid returns. But if one or more of the underlying companies in those funds ends up being overvalued, the stock’s performance might fall below investor expectations.

Evaluating a Company’s Potential for Growth

Assessing a company’s potential for growth, either in the near or long term, is not an exact science. But it’s important to consider how likely a company is to grow when determining whether it’s a good fit for a growth portfolio. This typically involves looking at several key metrics, including:

•  Return on Equity (ROE). Return on equity is used to measure company performance. It’s calculated by dividing net income by shareholder equity over a set time period.

•  Earnings Per Share (EPS). Earnings per share represents a company’s total profit divided by its total number of outstanding shares. EPS is used to measure a company’s profitability.

•  Price to Earnings to Growth (PEG). The price to earnings to growth ratio represents the price to earnings (P/E) ratio of a stock divided by the growth rate of its earnings over a set time period. Growth funds tend to have a higher P/E ratio (price to earnings ratio), which is the cost of a company’s stock relative to its earnings-per-share (EPS) than other funds. This can make them more expensive, but their potential for growth might make the extra cost worth it.

When using these and other metrics to measure a company’s growth potential, it’s important to understand how to interpret them. For example, a company that has a higher earnings per share is generally viewed as being more profitable. Likewise, a high price to earnings ratio is considered to be an indicator of continued growth.

But investors should also consider how sustainable the outlook for profitability and growth truly is, given the context of a company’s revenue, debt, and cash flows.

Buying Growth Mutual Funds

When choosing which growth stocks or growth funds to invest in, there are several factors investors may choose to consider. These include:

•  Historical performance

•  Stocks and other securities held in the fund

•  Fund fees (e.g., the expense ratio)

•  Potential earnings

Growth funds can often — but not always — be identified by the word growth in their name. Some investors might choose to put their money in blended funds, which combine growth stocks with less risky holdings. These funds allow investors to benefit from some of the upsides of growth funds without quite as much risk.

Certain growth funds are exchange-traded funds, or ETFs. Like any ETF, these funds can be traded during the day like stocks.

It’s important for investors to understand the risks before investing in any stock or fund, and to build a diversified portfolio of assets in order to help mitigate risk. With a diversified portfolio, investors hold both riskier assets and less volatile assets, in an effort to reap potential benefits of growth without losing too much along the way.

It’s also vital to remember that past performance is not a guarantee of how well a stock or growth fund will perform in the future.

Recommended: Stock Market Basics

Investing for Growth or Value?

Growth investing and value investing are couched as different styles of investing, yet they share a similar profit-driven focus — just a different means of getting there. With growth investing, the overarching goal is to invest in companies that have solid potential for growth. With value investing, the goal instead is to find companies that have been undervalued by the market — and hopefully see them increase in value.

A value investor may seek out companies that they believe are bargains based on current market price. They then invest in these companies, either by purchasing individual shares or through value mutual funds, and hold onto those investments over time. The end goal is to eventually sell their shares for a profit down the line.

In addition to eventual capital appreciation, value stocks can also pay dividends to investors. Value stocks are typically more likely to be established companies rather than newer ones. The most important thing to know with value investing vs. growth investing is how to avoid a value trap. This is a company that appears to be undervalued, but actually has a correct valuation. In that case, an investor might buy in, expecting the stock’s price to rise over time, only to be disappointed by a price that stays the same or worse, declines.

Determining When to Invest in Growth Mutual Funds

Dollar cost averaging is a way to invest small amounts of money consistently over time, rather than attempting to time the market, which helps investors to limit their risk exposure. However, if there is a stock market correction, it can be a good time to pick up some extra assets while they’re at particularly low prices.

Growth stocks tend to do well during bull markets, so while they may not see significant gains during a recession, they can still be an option to consider for long-term investments to pick up before the next economic boom.

The Takeaway

Growth stocks have a primary goal of capital appreciation. These stocks are expected to grow more quickly than other stocks in the market, and because of this, growth mutual funds are considered riskier investments than other mutual funds with a high risk of loss along with a higher potential for gain.

Growth funds holdings tend to have a higher P/E ratio (price to earnings ratio), which can make them more expensive investments, but their rapid growth may make the extra cost worth it.

These types of funds are more likely to see returns during an economic boom, vs during a recession. During a recession or economic downturn, companies may not have the cash or earnings to be able to invest in growth, and the value of the stocks the fund could go down.

Investors who know the basics of growth mutual funds may be interested in adding some of these assets, or other types of mutual funds and ETFs, to their investment portfolio.

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FAQ

Do growth funds pay dividends?

No, typically growth funds do not pay dividends because the underlying stocks held in the fund, which are growth stocks, reinvest profits into the company to fuel growth.

How risky is a growth fund?

Growth funds, like growth stocks, are generally considered higher risk owing to the volatility of some of the stocks they hold. Some investors may appreciate the potential for bigger gains, while others may not tolerate the risk exposure.

Which is better, investing for growth or income?

Choosing between an income strategy or a growth strategy will likely depend on your investment time horizon, as well as your goals. Investors in retirement may prefer investing with income in mind; younger investors with more years to ride out any volatility may want to invest in growth funds.

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