Growth Funds

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on July 03, 2023

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What Are Growth Funds?

Growth funds are a category of mutual funds or exchange-traded funds (ETFs) that focus on investing in stocks of companies with higher-than-average growth potential.

These companies are expected to experience rapid revenue and earnings growth, leading to an increase in their stock prices.

Growth funds typically invest in companies that are experiencing rapid growth in their earnings, revenue, or market share. These companies often reinvest their profits into further growth opportunities, rather than paying dividends to shareholders.

The primary objective of growth funds is to provide investors with capital appreciation. By investing in companies with strong growth prospects, these funds aim to generate higher returns than the broader market over the long term.

Types of Growth Funds

There are various types of growth funds, each focusing on a specific market capitalization, region, or sector. Understanding these types can help investors choose the right fund for their investment goals.

Large-Cap Growth Funds

Large-cap growth funds invest in large, established companies with strong growth potential. These companies usually have a market capitalization of over $10 billion and are considered less risky than smaller companies.

Mid-Cap Growth Funds

Mid-cap growth funds focus on medium-sized companies with a market capitalization between $2 billion and $10 billion. These companies may offer higher growth potential than large-cap companies but also come with increased risk.

Small-Cap Growth Funds

Small-cap growth funds target small companies with a market capitalization of less than $2 billion. These companies have the potential for significant growth but are also associated with higher risk due to their smaller size and vulnerability to market fluctuations.

International Growth Funds

International growth funds invest in companies based outside the United States, providing investors with exposure to global growth opportunities.

These funds can offer diversification benefits but may also carry additional risks such as currency fluctuations and political instability.

Sector-Specific Growth Funds

Sector-specific growth funds focus on companies within a particular industry or sector, such as technology or healthcare. These funds can offer concentrated exposure to high-growth industries but may also be more susceptible to industry-specific risks.

Types of Growth Funds

Advantages of Investing in Growth Funds

Investing in growth funds can offer several benefits, including the potential for higher returns and diversification. Understanding these advantages can help investors determine if growth funds are a suitable addition to their portfolio.

Potential for Higher Returns

Growth funds aim to invest in companies with strong growth potential, which can result in higher returns compared to more conservative investment options. However, higher returns often come with increased risk and volatility.

Diversification of Portfolio

Growth funds can provide diversification benefits by investing in a variety of growth-oriented companies across different industries and market capitalizations. This can help reduce overall portfolio risk and improve long-term performance.

Professional Management

Growth funds are managed by professional portfolio managers who have expertise in identifying and investing in high-growth companies. This can save investors time and effort while potentially improving their investment results.

Disadvantages of Investing in Growth Funds

Like all investments, growth funds come with certain risks. Understanding these risks can help investors make informed decisions about whether to include growth funds in their portfolio.

Market Volatility

Growth funds tend to be more volatile than other types of funds due to their focus on high-growth companies.

These companies are often more sensitive to market fluctuations and economic conditions, which can result in larger price swings and increased risk for investors.

Industry Risks

Since growth funds often invest in companies within specific industries or sectors, they may be more susceptible to industry-specific risks.

For example, a technology-focused growth fund may be negatively impacted by regulatory changes or a decline in consumer demand for tech products.

Management Risks

The performance of growth funds depends on the skill and expertise of their portfolio managers.

Poor investment decisions or failure to identify high-growth opportunities can lead to underperformance compared to the fund's benchmark or other investment options.

Advantages and Disadvantages of Investing in Growth Funds

Performance Evaluation of Growth Funds

Evaluating the performance of growth funds is crucial for investors to make informed decisions. Several tools and metrics can be used to assess fund performance, including benchmarks, risk-adjusted measures, and ratings from fund-rating agencies.

Benchmarks and Indices

Benchmarks and indices are used to compare the performance of growth funds against a representative sample of the market. Common benchmarks for growth funds include the S&P 500 Growth Index and the Russell 2000 Growth Index.

Risk-Adjusted Measures

Risk-adjusted measures, such as the Sharpe ratio, help investors evaluate a fund's performance relative to its level of risk. Higher risk-adjusted performance indicates that a fund has generated better returns for a given level of risk compared to other funds.

Fund Rating Agencies

Fund rating agencies, such as Morningstar and Lipper, provide ratings and analysis on growth funds based on various factors, including past performance, risk-adjusted returns, and fees.

These ratings can help investors identify top-performing growth funds for their portfolios.

Strategies for Investing in Growth Funds

Implementing effective investment strategies can help investors optimize their growth fund investments. Some common strategies include dollar-cost averaging, asset allocation, diversification, and regular portfolio rebalancing.

Dollar-Cost Averaging

Dollar-cost averaging involves investing a fixed amount of money in growth funds at regular intervals, regardless of market conditions. This approach can reduce the impact of market volatility and help investors avoid making poor investment decisions based on short-term market fluctuations.

Asset Allocation

Asset allocation is the process of dividing an investment portfolio among different asset classes, such as stocks, bonds, and cash. Allocating a portion of a portfolio to growth funds can help investors balance potential risks and rewards based on their investment goals and risk tolerance.


Diversification involves investing in a variety of growth funds that focus on different market capitalizations, sectors, or regions. This can help reduce overall portfolio risk and improve long-term investment performance.

Regular Portfolio Rebalancing

Regularly rebalancing a portfolio involves adjusting the allocation of growth funds and other investments to maintain a desired level of risk and return.

This can help investors stay on track with their investment goals and prevent their portfolios from becoming overly concentrated in a single asset class or investment type.


Growth funds can play an important role in portfolio management, offering the potential for higher returns and diversification benefits.

By understanding the different types of growth funds, their advantages and risks, and strategies for investing, investors can make informed decisions about including growth funds in their portfolios.

It is essential to consider individual investment goals and risk tolerance before investing in growth funds, and to regularly evaluate and adjust investment strategies to optimize performance.

Growth Funds FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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