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Investing in Growth Funds

November 25, 2020 · 5 minute read

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Investing in Growth Funds

Growth funds, or growth equity mutual funds, are stock portfolios with a primary goal of capital appreciation. These funds are a type of mutual fund—groups of stocks which can be purchased all at once in a bundle—along with value funds and blend funds.

Growth mutual funds don’t necessarily only contain stocks, they can also include bonds and other investments, but they tend to mostly contain growth stocks.

Unlike some value stock funds, growth funds pay little to no dividends, so investors make money on the appreciation of the growth stock or growth fund over time. The stocks in the growth fund portfolio are chosen for the likelihood that they will grow more quickly than other stocks in the market. For this reason, growth mutual funds are considered riskier investments, with a high risk of loss along with a higher risk of gain.

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 per-share earnings (EPS) than other funds. This can make them more expensive investments, but their quick growth can make the extra cost worth it.

Examples of Growth Stocks

Growth stocks can be either large-cap corporations, mid-cap, or smaller companies. Small companies can often have more potential for growth, but large-cap companies can scale their manufacturing to produce more products at cheaper prices, allowing them to continue growing. Plus, these companies tend to reinvest the money they make into research and development, acquisitions, or expansion.

Most growth stocks are companies within the technology industry, but there are growth stocks in all industries. Some growth funds are industry specific, while others include stocks from a mix of industries.

Certain growth funds that focus on only large-cap companies with a market capitalization of $10 billion or higher.

Large-cap growth funds make up most of the growth fund market and hold $2.2 trillion in total assets. Two examples of growth stocks from large companies are Apple (AAPL) and Facebook (FB). Currently the largest growth fund is the Growth Fund of America. Over the past 10 years this fund has seen an average growth of 12.6% each year. The Growth Fund of America is made up of 20.5% technology stocks, 18.8% communication services stocks, while 5.6% of the fund is Facebook stock.

In recent years, international growth funds have become more popular, as investors are looking to benefit from global growth. Some of the companies found in foreign and international growth funds include Alibaba, Baidu, Tencent, ASML Holding, and MercadoLibre Inc.

There are also growth index funds, which passively invest by tracking the performance of a particular stock index.

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Benefits of Investing in Growth Mutual Funds

Growth stocks are more likely to see returns during an economic boom cycle, when many companies are growing and thriving.

Since growth funds invest in stocks that are expected to have a relatively high amount of growth, these investments have the potential for solid returns.

For example, in 2018 growth funds averaged a 10-year return of about 13%, which is higher than both the Dow Jones Industrial Average and the S&P 500.

Downsides and Risks of Growth Mutual Funds

While growth stocks can potentially increase in value more quickly than other stocks, this also makes them a riskier and more volatile investment. In order for a growth stock to keep growing, the company must continue to earn more money. This is challenging for any company to maintain over a long period of time. If there is a recession, a company has an unforeseen loss, or can’t continue to grow, the value of the stock will go down.

To manage this risk, investors may choose to hold growth stocks and growth mutual funds for the long term, so that they can ride out the fluctuations and ultimately be more likely to make a profit.

Investing in 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 in the fund
•  Cost and potential earnings

Growth funds can often—but not always—be identified by the word growth in their name, such as the Fidelity Growth Company (FDGRX), the T. Rowe Price Blue Chip Growth Fund (TRBCX), and the Vanguard Growth Index (VIGAX).

Some investors choose to put their money in blended funds, which combine growth stocks with less risky stocks. 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. These funds differ from growth mutual funds or index funds in that they can be traded online like a stock.

Growth stocks and growth mutual funds tend to have a higher degree of risk than other types of ETFs and index funds, but they can also have a greater potential for returns. There is no guarantee that a company’s investments aimed at growth will lead to increased profits.

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 mitigate risk. With a diversified portfolio, investors hold both riskier assets and safer assets, in an effort to reap the benefits of growth without losing too much along the way.

Determining When to Invest in Growth Mutual Funds

By investing small amounts of money consistently over time, rather than attempting to time the market, investors average out the price they pay for investments. 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.

Investing in growth funds during an economic downturn may seem like a scary time to buy, but the point of buying a little bit consistently over time is to buy stocks at both lower and higher prices to get a solid average price.

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

As always, investing is personal. If an investor has just lost their job or sees financial hardship ahead, it may not be the right time to invest. That money is better off set aside for housing costs and other immediate expenses.

Experts consistently advise investors to build up an emergency fund and pay off any high-interest debts before putting significant amounts of money into potentially risky investments.

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 growth, 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 risk of gain.

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 per-share earnings (EPS) than other funds. This can make them more expensive investments, but their quick growth can make the extra cost worth it.

These types of funds are more likely to see returns during an economic boom cycle, vs 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 stock will go down.

On the other hand, if an investor is in a financially secure place, they might strategically invest in growth stocks during a recession, buying low in order to recoup their investments in the long term.

Investors who know the basics about growth mutual funds may be interested in adding some of these assets, or other types of mutual funds, to their investment portfolio. One way for an investor to add mutual funds and ETFs to their holdings is with the SoFi app. With SoFi, investors can track favorite stocks, stay up to date on the latest market news, and purchase stocks right from their phone.

SoFi Invest® offers the most popular growth funds, as well as ETFs. SoFi also gives investors the ability to keep track of their expenses and set financial goals. A team of professional financial advisors are available to answer investors’ questions and help them create a personalized investment plan.

Learn how to get started investing with SoFi Invest.

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