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Composition of Growth Mutual Funds

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Composition of Growth Mutual Funds

The managers of growth funds invest in the stocks of companies that show the greatest potential for growth. They choose these because the stocks of potentially high-performing companies are in demand and are likely to increase in price.

Things To Know

  • Growth funds may include value stocks in them.
  • Growth funds may include small-cap, mid-cap, and/or large-cap stocks.

Value stocks

Some managers choose stocks that they believe are selling for less than they are worth. These managers believe that such stocks (called value stocks) will eventually increase in demand and thus rise in value.

Studying the underlying companies

Other managers choose stocks by studying a company’s profits and predicting whether these profits will continue. Fund managers also look for stocks they think will grow faster than the inflation rate. This makes growth funds popular with investors who are looking for a hedge against inflation.

Small-cap stocks

Growth funds may also invest in small, rapidly growing companies called small-cap companies. "Cap" refers to capitalization, which is the amount of money invested in the company. Small-cap firms have relatively small amounts of invested money.

Because less of the company’s profits must go to repay investors, mutual fund managers believe these companies are likely to earn substantial profits in the near future. Mid-caps are also popular choices. Large-cap companies are less popular because they grow less rapidly. Nevertheless, many growth funds choose them because they perform well while being generally less volatile than small-cap and mid-cap stocks.