Growth fund definition
A growth fund is a portfolio of stocks whose main objective is capital appreciation as opposed to dividend payouts and yield income. It is a type of ETF (exchange-traded fund) or mutual fund; in the same category as the value fund.
It is important to note that while a typical growth fund bears a high potential for the increase of the investors’ capital, the embedded risks are significant. In other words, it is a high-risk, high-reward investment option. As such, it is recommended for investors looking for long-term investment and have high risk tolerance. There are various subcategories of the growth fund, depending on the embedded companies. The large-cap growth fund focuses on large-capitalization firms. Besides, the foreign growth fund includes international companies like Alibaba.
A good example of a growth fund is the Invesco QQQ ETF. The fund tracks the Nasdaq 100 index and embeds 100 large-capitalization companies that are listed on the Nasdaq stock exchange. This includes firms such as Facebook, Apple, and Alphabet. You may have heard the fund being referred to by its former title, PowerShares QQQ Trust ETF (QQQ). If you are looking to invest in non-financial stocks that are in the technology sector, this may be a viable long-term investment option.
Another popular example of a growth fund is Vanguard US Growth Fund Investor Shares (VWUSX). Its assets are invested in large-capitalization US firms with a growth potential that is above average. However, the fund is not diversified.
Growth fund’s defining features
No dividend: Since the primary objective of a growth fund is capital growth, it has little to no dividend payouts.
Substantial returns: This is one of the features that attract investors to this investment option. The skilled fund managers handpick stocks that will yield a high return for the investor in the long run.
Long-term investment option: Growth funds are only ideal for the individuals ready to make a long-term commitment. In the short term, the embedded stocks may not yield significant returns. However, by committing to the investment option for about 5-10 years, one benefits from capital appreciation.
Diversification: As aforementioned, a growth fund is a portfolio of stocks. It is one of the ways that investors are able to minimize the involved risks.
High volatility: growth funds are usually subject to high market volatility. This is because stocks tend to fluctuate in price due to various influential factors.
Risk intensive: A growth fund is an ideal investment option for those with a high risk appetite. While the high market volatility may cause the stocks’ prices to fluctuate considerably, the long-term returns make it a viable investment.
Professional management: As a mutual fund, the selection of the stocks in a growth fund is the role of a skilled fund manager. The investor remains passive while the manager oversees the dealings related to the fund. The manager is also tasked with the role of making the decision to buy or sell a particular stock.
Reinvestment of the returns: Unlike a dividend fund, the main objective of a growth fund is capital appreciation. As such, the earnings from the stocks are put back into the scheme to increase the long-term returns.
