# Comprehensive Guide to Growth Funds: Definition, Types, and Performance

> **Definition**
>
> A growth fund is a type of mutual fund or exchange-traded fund (ETF) that invests in companies expected to grow at an above-average rate.

## What Is a Growth Fund?

A growth fund is a type of mutual fund or exchange-traded fund with the primary goal of generating [capital appreciation](https://www.investopedia.com/terms/c/capitalappreciation.asp) by investing in fast-growing companies. Growth funds typically reinvest earnings in business expansion, [acquisitions](https://www.investopedia.com/terms/a/acquisition.asp), or [R&D](https://www.investopedia.com/terms/r/randd.asp), which usually means they don't pay dividends. They're ideal for investors with a long-term investment horizon and a high risk tolerance. Keep in mind that the higher returns growth funds offer mean greater risk. They can be more volatile than other funds. Growth funds are separated by market capitalization into small-, mid-, and large-cap.

### Key Takeaways

*   Growth funds focus on capital appreciation by investing in companies that reinvest earnings rather than pay dividends.
*   These funds are split by market capitalization into small-, mid-, and large-cap categories.
*   Growth funds are typically higher-risk but offer the potential for greater returns over the long term.
*   International growth funds invest in foreign stocks with strong revenue and earnings growth, especially in technology and consumer sectors.
*   Technology stocks are a major component of growth funds due to their high growth and valuation ratios.

## Understanding How Growth Funds Operate

The high-risk, high-reward mantra of growth funds can make them ideal for those not retiring anytime soon. Typically, investors need a [tolerance for risk](https://www.investopedia.com/articles/pf/07/risk_tolerance.asp) and a [holding period](https://www.investopedia.com/terms/h/holdingperiod.asp) with a time horizon of five to ten years. Growth fund holdings often have high [price-to-earnings (P/E)](https://www.investopedia.com/terms/p/price-earningsratio.asp) and [price-to-sales (P/S)](https://www.investopedia.com/terms/p/price-to-salesratio.asp) multiples. This trade-off from investors is the above-average [revenue](https://www.investopedia.com/terms/r/revenue.asp) and earnings gains these companies produce.

## Exploring Different Types of Growth Funds

Growth funds, along with [value](https://www.investopedia.com/terms/v/valuefund.asp) and blend funds, are key types of [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp) and [ETFs](https://www.investopedia.com/terms/e/etf.asp). They tend to be more volatile than value and blend funds. Growth funds are typically split by [market capitalization](https://www.investopedia.com/terms/m/marketcapitalization.asp), with funds representing small-cap, mid-cap, and large-cap groupings.

Large-cap growth mutual funds are one of the largest types of mutual funds in terms of market share. Large-blend funds, which offer investors value and growth, are also very popular. Foreign large-cap growth funds are much lower in terms of market share.

Foreign growth funds are increasingly popular for investors seeking global growth opportunities. These funds invest in international stocks posting strong revenue and earnings growth. Technology and consumer sectors are most common in international growth funds. Large internet names such as Tencent (TCTZF), Baidu ([BIDU](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BIDU)), and Alibaba ([BABA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BABA)) can be found among the top ten holdings for many international growth funds.

## Spotlight on the Largest Growth Fund

One of the largest growth funds is the Growth Fund of America (AGTHX) from American Funds. This mutual fund had over $253 billion in [assets under management](https://www.investopedia.com/terms/a/aum.asp) (AUM) as of March 2022 and the stock price was up 10% over the last year, despite the market [volatility](https://www.investopedia.com/terms/v/volatility.asp). The fund's average annual return was 14.28% over the last ten years, as of Feb. 28, 2022.

The Growth Fund of America has Tesla, as its largest holding, representing 7.1% of assets. [Technology](https://www.investopedia.com/terms/t/technology_sector.asp) stocks make up the largest sector at 34.9%. [Consumer Discretionary](https://www.investopedia.com/terms/c/consumer-discretionary.asp) stocks follow closely behind with 24.3% of assets.

> **Important**
>
> Technology stocks are a major part of growth funds. With high growth and high P/E and P/S ratios, technology stocks fit the criteria perfectly for growth funds.

## Evaluating the Performance of Growth Funds

The majority of the best performing large-company stock funds over the last decade have been growth funds. For example, the Morgan Stanley Multi Cap Growth A (CPOAX) is the best performing large-company stock fund over the last ten years, with an annualized return of 23.3%. Currently, its top three holdings include Snowflake, Inc. ([SNOW](https://www.investopedia.com/markets/quote?tvwidgetsymbol=SNOW)), Cloudflare, Inc. ([NET](https://www.investopedia.com/markets/quote?tvwidgetsymbol=NET)), and The Trade Desk ([TTD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=TTD)).

## The Bottom Line

Growth funds' primary objective is capital appreciation rather than dividend payouts. They invest in rapidly expanding companies that reinvest earnings to facilitate further growth. They carry greater risk than other types of funds but offer the potential for greater returns. This profile makes them suitable for investors with a long-term investment horizon and a high risk tolerance. Growth funds can be small-, mid-, and large-cap, and typically are more volatile than value and blend funds. One of the largest growth funds is the Growth Fund of America.

> **Article Sources**
>
> 1.  Capital Group. "[The Growth Fund of America (AGTHX)](https://www.capitalgroup.com/individual/investments/fund/agthx)."
>     
> 2.  Morgan Stanley. "[Insight Fund (CPOAX)](https://www.morganstanley.com/im/en-us/financial-advisor/product-and-performance/mutual-funds/us-equity/insight-fund.shareClass.A.html)."