Growth stock mutual funds invest in growth companies, usually young businesses in sectors that are booming. They can be used for long-term investing or for holding during optimal stages of the business cycle. Investors interested in growth funds should understand the nature and benefits of this popular investment vehicle.
Here's a rundown on growth funds, followed by some excellent choices for growth fund beginners.
Growth Funds Definition
Growth funds are mutual funds or exchange-traded funds (ETFs) that hold growth stocks, which are stocks of companies expected to grow faster than the overall stock market.
It's critical to understand the differences between growth stocks—and the funds that invest in them—and value investing. If you invest in growth stocks, you're buying stocks of companies in the growth phase.
During this phase, a company is growing in terms of revenues (and hopefully its profit margin) faster than during other stages, such as the startup and maturity phases. During the growth phase, most companies reinvest profits in the company rather than paying dividends to shareholders. Companies in their mature phase are typically viewed by investors as value stocks.
Businesses go through five stages—seeding and development, startup, growth and establishment, expansion, and maturity. Each phase brings different investment possibilities.
An example of a growth stock is Amazon (AMZN). A value stock example is Johnson & Johnson (JNJ). Both are large companies; however, AMZN is still in the growth phase of its business life cycle. It uses a large portion of its profit to reinvest in the company, whereas JNJ is in the mature stage and shares more of its profits with shareholders in the form of dividends.
Best Time to Invest in Growth Funds
Mutual funds and ETFs are generally intended to be long-term holdings (at least three years but more appropriately 10 years or more). With that said, growth funds typically outperform value funds in the last stage of an economic cycle, or the period before a recession begins.
Many investors try to buy stocks right before a recession ends and sell just before a recession begins. These periods can last more than a year or less than a few weeks.
For example, growth funds have outperformed value funds since 2007, the final calendar year before the Great Recession of 2008.
Best Growth Funds for Most Investors
Choosing a growth fund for your portfolio is no different than shopping for clothes. There is no one-size-fits-all choice that works for everyone, but there are some that consistently perform.
If you want to passively invest in large-cap U.S. growth stocks with a low-cost, no-load mutual fund, the Vanguard Growth Index Fund Admiral Shares (VIGAX) is an excellent choice. The VIGAX portfolio consists of about 260 of the most significant growth names in the U.S., like AMZN and Facebook (FB). Expenses are low at 0.05%, and the minimum initial investment is $3,000.
If you want to take the actively managed route, you may not find a better growth stock mutual fund than Fidelity Contrafund (FCNTX), at least not while veteran manager Will Danoff is at the helm. Danoff, FCNTX's manager since 1990, has seen just about every economic and market environment you can imagine, and he's averaged top-notch performance in the long run.
Actively managed funds continuously turnover stocks within the fund, switching out lower-performing ones for stocks that generate higher returns.
For reference, FCNTX has performed ahead of the average large growth fund for 1-, 3-, 5-, and 10-year returns. Considering the outstanding performance and high-quality management, the expense ratio of 0.86% is cheap, and there is no minimum initial investment.
Investors looking for a pure dose of growth in a sector fund will want to consider investing in one of the best technology funds like Fidelity Select Technology (FSPTX). Tech stocks are commonly the most aggressive growth stocks you can buy. The FSPTX portfolio holds mostly large-cap tech stocks like Apple (AAPL), Microsoft (MSFT), and Nvidia (NVDA). Expenses are reasonable at 0.69%, and there is no minimum investment.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.