A growth fund is a portfolio that contains a wide range of stock options that are selected primarily for their potential for capital appreciation over time. Often, the stocks involved offer little to no dividends to the investor, but are positioned in a manner where there is a good chance that the unit price of each stock will increase significantly within a given period of time. It is not unusual for the assets contained in the fund to carry a higher degree of risk than some other investment offerings, but the potential returns usually offset the risk involved. Assuming the stocks perform as anticipated, the return achieved can be considerable.
There are several characteristics that investors normally look for when selecting stocks for inclusion in a growth fund. The company issuing the stock must exhibit above average growth in the earnings posted from one year to the next. In addition, the business must place a sizable amount of those increased earnings back into the company in some form. For example, the company may utilize the increased earnings to manage acquisitions, expand the production facilities of the business, or to facilitate research and development efforts.
For the investor, choosing the right stocks for the growth fund often includes looking closely at how long the stock can be held without generating much or anything in the way of dividends. Ideally, the investor should be in a position to hold the growth fund stocks for at least a decade before selling them. This tends to maximize the return that is realized once the stock is sold, assuming that the value of the shares increased according to projections.
While the goal is to hold the stock for at least ten years, there are situations in which there is a need to sell early and replace a stock with another investment that shows promise of performing well over the long term. Generally, investors try to keep the turnover ratio with the growth fund as low as possible, and tend to use this method only when unanticipated market shifts or other factors seriously impact the ability of the stock to perform according to expectations. When replacing a stock is necessary, care should be taken to make sure that the current shifts in the market will not have the same effect on the newly acquired security, thus defeating the purpose for making the change.
Since the assets in a growth fund do tend to carry a higher rate of volatility, investors must look closely at the risk-return tradeoff, and determine if the amount of risk involved is worth the possibility of earning the projected return. This can be somewhat complex, since it requires not only looking at the history of the investment, but also which changes are likely to occur in the marketplace during the time that the asset is held. For this reason, identifying investments to include in this type of mutual fund portfolio should involve a great deal of research before the order to buy is executed.