Growth Funds: Definition, Types, and Performance

What is a growth fund?

A growth fund is a mutual fund or exchange-traded fund (ETF) that seeks capital appreciation by investing in companies expected to grow faster than the market. These companies typically reinvest earnings into the business (expansion, acquisitions, research and development) rather than paying regular dividends. Growth funds tend to be more volatile and are best suited for investors with a longer time horizon and a higher tolerance for risk.

Key takeaways

• Primary objective is capital appreciation, not dividend income.
• Holdings often have high price-to-earnings (P/E) and price-to-sales (P/S) ratios.
• Categorized by market capitalization: small‑cap, mid‑cap, and large‑cap growth funds.
• Technology and consumer-oriented companies are common holdings.
• Higher potential returns come with higher volatility and risk; suitable for long-term investors.

How growth funds operate

Growth funds concentrate on companies showing above-average revenue and earnings growth prospects. Fund managers select stocks expected to gain market share or expand rapidly, accepting higher valuation multiples in exchange for future growth potential. Because these companies generally reinvest profits, growth funds typically pay little to no dividends.

Investor considerations:
* Time horizon: often five to ten years (or longer) to ride out volatility.
Risk tolerance: growth funds can experience sharp drawdowns in market downturns.
Valuation exposure: high P/E and P/S multiples increase sensitivity to changing investor sentiment.

Types of growth funds

• By market capitalization:
• Small‑cap growth — higher upside potential, higher volatility.
• Mid‑cap growth — balance of growth and stability.
• Large‑cap growth — more established companies with strong growth prospects.
• By geography:
• Domestic growth funds focus on companies in a single country.
• International/foreign growth funds target fast-growing companies abroad and often have a heavy weighting in technology and consumer sectors.
• By strategy:
• Sector-focused growth funds concentrate on specific industries (e.g., technology).
• Multi-cap growth funds allocate across caps to capture growth at different company sizes.

Large-cap growth mutual funds hold a significant share of the growth-fund market, while foreign growth funds are a popular choice for investors seeking global opportunities. Top international growth holdings often include major internet and technology companies.

Notable examples

• Growth Fund of America (AGTHX) — One of the largest growth mutual funds, with substantial assets under management and a heavy allocation to technology and consumer discretionary sectors. Notable holdings have included major technology and internet companies.
• Morgan Stanley Multi Cap Growth A (CPOAX) — An example of a high-performing large-company growth fund, with multi-year outperformance driven by holdings in fast-growing cloud and ad-tech companies such as Snowflake, Cloudflare, and The Trade Desk.

(These examples illustrate typical holdings and strategies used by large growth funds; specific allocations and performance vary over time.)

Evaluating growth fund performance

When assessing growth funds, consider:
* Long-term returns versus relevant benchmarks and peer funds.
Volatility and maximum drawdowns during market declines.
Expense ratio and fees, which can erode returns over time.
Portfolio concentration and sector exposure (e.g., heavy tech weighting).
Turnover and tax efficiency, particularly for taxable accounts.
* Manager track record and consistency of the investment approach.

Growth funds have powered many of the top-performing large-company stock funds over multi-year periods, but past outperformance does not guarantee future results.

Bottom line

Growth funds aim to generate capital appreciation by investing in companies with strong growth prospects. They offer the potential for higher long-term returns but come with greater volatility and valuation risk. These funds are most appropriate for investors with a long investment horizon and a higher risk tolerance who are comfortable with sector concentration—especially in technology and consumer-related companies.