The term growth fund refers to a portfolio of stocks that are expected to provide above average earnings or revenue growth. The same equities that provide growth funds with the potential for higher than average returns will also have above average risk.
Growth funds specialize in purchasing equities of companies the fund’s management team estimates will have above average growth in either earnings or revenues. As such, the value of these equities is expected to increase faster than average. The stated objective of a typical growth fund will be “capital appreciation.”
The companies included in a growth fund’s portfolio are likely to be expanding operations through organic opportunities as well as acquisitions. Companies with a lot of opportunities to expand operations will typically reinvest their earnings into internal efforts such as research and development. This means growth of earnings will not be returned to the investor in the form of dividends.
Investors choosing growth funds should have relatively high risk tolerance scores, since their investment becomes a commitment to a portfolio of companies with longer term growth potential. While the value of these stocks can be expected to increase rapidly during a bull market, they can also be expected to decrease faster during a bear market, thereby exhibiting above average volatility.