What are Small-Cap Growth Funds?

A. Leverkuhn
A. Leverkuhn
Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

Lots of finance professionals would describe small-cap growth funds as funds composed of less capitalized stocks that pursue a moderate to aggressive trading strategy. In general, small-cap growth funds are different kinds of funds that seek to use smaller stocks in the interest of “growth investing,” as opposed to a different traditional stock trading philosophy called “value investing.” Knowing the difference in how these strategies work will help investors choose funds that match their own needs and existing portfolios.

In growth investing, the investor is hoping to buy smaller stocks while they are less established and priced lower. The implication is that over time, if the company is successful, the smaller stock will gain price as the company expands. Growth investing often seeks out “small-cap stocks,” or other less expensive stocks, for inclusion in a growth investing initiative.

Small-cap stocks are desired in growth investing because they have a lot of potential, on average, to expand total share value and increase in price. Professionals define small-cap stocks as the stocks of companies that are “capitalized” under a certain amount. Market capitalization for a stock is the total number of outstanding shared multiplied by share price. For instance, a company F with 100,000 shares of stock where a single share is valued at five dollars has a total market capitalization of $500,000. Many experts define small-cap stocks as stocks with market capitalization under two billion dollars.

Investors who have found a lot of potential in small-cap stocks might look to broader diversified funds for getting more of these stocks into a portfolio. Different kinds of index funds and other mutual fund options can present the investor with a single opportunity to get involved, at a fixed price and with particular projected yields. These small-cap growth funds are extremely attractive to some investors who want more diversification without the time-consuming work in selecting all sorts of single small-cap stocks.

In order to really understand how small-cap growth funds are used, investors can compare these to funds that cater to larger capitalization. A “large-cap value fund” might consist of many blue-chip stocks that are seen to have a stable share price relative to the general market. These funds might have lower annual yields on average, but may include less risk than other kinds of index funds containing smaller stocks.

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