Like all mutual funds, growth funds are made up of numerous underlying stocks. They are mostly stocks in companies that are already doing well, but are relatively unheard of. These companies are in the “growth” stage of their development. They are past the start-up, and they are set to do very well over the next several years. During this time they are using all of their earnings to reinvest in company expansion, so the idea of a issuing a dividend is the furthest thing from their minds. This expansion and growth serves to increase the value of the stock and subsequently the value of the growth fund. Take for instance companies like Google (GOOG) and Apple (AAPL). Ten years ago these were relatively unheard of companies. Today they are booming.
While the market is going up and doing well, growth funds appear to be the best choice for anyone. They increase in value more than most of the other funds, and they look appealing. While the underlying companies are doing well, the funds will do well. But for a growth investor they need to be aware that rapid growth can also mean rapid losses.
When the market corrects itself, those funds that had shot up in value are very likely to drop just as quickly. The ultimate goal, obviously, is that they will not lose as much value as they had gained. If the investor has been dollar cost averaging they will fare much better than those who are trying to time the market.
Many aggressive investors are heavily invested in growth funds. That is because they have a lot to offer. In the long run, these funds are the ones that will increase the most in value and have the best rates of return. For those who cannot stomach the ups and downs of the roller coaster ride they provide, they should look more toward value funds. It is important to be aware that many of these investment sectors have a lot of overlap too. For example, a growth fund can also be an international fund. The idea is to get as much diversification in your portfolio as possible so you can weather financial storms.
Do you invest in growth funds?