Growth stock mutual funds are funds that focus on growth companies. These are often younger firms that are getting bigger. They may also be in hot industry sectors. Industries like these are expected to grow at a faster rate than the overall stock market.
Learn more about growth stock funds, and find out whether they are a good choice for your goals.
What Are Growth Stock Mutual Funds?
Growth stock mutual funds are funds that invest in multiple stocks. This allows you to hold shares in many companies at once without buying individual stocks.
Growth stock mutual funds buy and hold growth stocks. If you want to grow your assets over time, growth stock funds can help you reach that goal. They also come with more risk than funds that invest in older or more stable companies and industries.
How Growth Stock Mutual Funds Work
Growth stocks often have high price valuations compared to the rest of the market. But they are expected to perform above the broader stock market. The level of growth that fund managers expect to see can be higher than the stocks' current price and earnings suggest.
Technology stocks are good examples of what growth stock mutual fund managers buy. Facebook (FB) stock was first offered to the public in 2012. It was valued at around $100 billion. The year prior, in 2011, it earned close to $1 billion.
A simple valuation represents the "present value of future cash flows." For example, if Meta (formerly Facebook) were to maintain its $1 billion annual income, it would take 100 years for an investor to earn back what they had invested. Instead, Facebook had a very high growth rate. It tripled its stock price over the next three years, through 2015.
By 2017, Facebook was among the largest growth stocks on the market. By 2018, it had averaged over 50% annualized return for the past five years. At the end of 2020, it had a $780 billion market capitalization on roughly $85 billion in revenues.
Although its price went up and down over its first three years, growth investors, growth stock mutual funds, and technology sector funds investing in Facebook saw healthy returns. If you invest in growth stocks today, you are betting that these types of companies will grow at a much faster rate than most others.
As the name implies, growth stock mutual funds typically perform best in the mature stages of a market cycle. This is when the economy is growing at a healthy rate.
The growth strategy reflects what corporations, consumers, and investors are all doing in healthy economies. They expect high future growth and spend more money to make it happen.
Again, technology stocks are good examples here. They are typically valued high, but they can keep growing beyond those valuations when the market is right.
Growth stocks pay low or no dividends. The value is in the growth of the underlying stock. This includes capital appreciation and capital gain.
Types of Growth Stocks
Another type of growth stocks is consumer discretionary stocks. These are also called "consumer cyclical stocks."
These stocks invest in companies that manufacture or provide products or services that are not necessary. These products and services could be things like luxury items, hotels, and entertainment.
If you want to invest in growth stocks, keep in mind that they can have many periods where their value swings up and down. Growth funds can have high returns in any given year, but they also tend to decline more than the average stock fund during bear markets. Because of this, growth stock mutual funds are best for aggressive investors. You'll want to have a long-term investment time horizon, such as 10 years or more to give you time to recover and see your investment grow in spite of downturns in value.
Alternatives to Growth Stock Mutual Funds
Not sure growth stock funds are the right choice for you? You might want to look into value stock funds.
Value stock funds invest in companies that are trading at a price lower than their business fundamentals would suggest is right. This means they are a good value for your money.
Many value stock funds pay dividends. This gives you a regular income as well as the potential for the value of your investment to grow. As a result, they are popular with retirees who depend on the income generated through dividends.
- Growth stock mutual funds invest in companies that are emerging or expected to grow at a higher rate than the overall market.
- These stocks perform best when the economy is growing.
- Technology stocks are often part of growth stock funds.
- Retired investors often prefer to invest in value stock funds, which are more stable and pay an income through dividends.