If you have always wanted to try “growth investing”, then there are lots of ways you can.
Growth funds are one of these ways, but what exactly are they? And if you do want to invest in one, which are the best growth funds?
My article will tell you everything you need to know about investing in growth funds, so keep reading to find out more.
Also consider: Best performing funds of 2022
There are many fantastic growth funds on offer for you to choose from. Of course, each one differs from the other – while one may offer exposure to companies with a larger market capitalisation, some may offer a better expense ratio.
So, while I will discuss several different growth funds on offer below, you may want to do some of your own research to find out which best suits your investment strategy too, as you have lots of options.
1. Vanguard Growth ETF
Holding $83 billion in assets, the Vanguard Growth ETF is the largest growth ETF on offer. With its size comes liquidity; typically, the larger a fund is, the easier it is to invest in them and then later sell your holding.
The Vanguard Growth ETF tracks the CRSP (often pronounced as “crisp”) US Large Cap Growth Index and offers a 10-year average total return of 16.4%. The expense ratio, which is described in more detail later in this article, is only 0.04%.
This fund is a great way to affordably obtain exposure to some of the largest growth shares on the market. In fact, as is the case with many growth funds, the Vanguard Growth ETF has more than 50% of its assets invested in tech companies, including:
- Alphabet (Google’s parent company)
2. iShares Russell Mid-Cap Growth ETF
Unlike the above fund, the iShares Russell Mid-Cap Growth ETF, commonly referred to by its ticker symbol, IWP, is a mid-cap growth fund.
This particular growth ETF tracks securities in the Russell 1000 Index, a stock market index that represents the 1,000 companies with the largest market capitalisation in the US.
As of 14 June 2022, IWP has an expense ratio of 0.23% and holds shares in 388 different companies, which amounts to $14 billion in assets altogether. Of this, the fund has around 12% of its total assets invested in its top 10 holdings, five of which include:
- Palo Alto Networks
- Index Laboratories
- Cadence Design Systems
3. Schwab US Large-Cap Growth ETF
The Schwab US Large-Cap Growth ETF (which has the ticker symbol “SCHG”) is a fund that offers exposure to both growth and value shares, which isn’t always the case for growth funds.
It tracks the Dow Jones US Large-Cap Growth Total Stock Market Index, which uses in-depth analysis to determine which companies in the US markets qualify as both growth and value shares. Dividend yields, for example, are tracked by this index, and those with a higher yield are more weighted towards value.
All in all, the SCHG has an expense ratio of 0.04% with around $17 billion in total assets, its top holdings being:
4. iShares Russell Top 200 Growth ETF
This is a far smaller growth fund compared to the others on this list. The iShares Russell Top 200 Growth ETF, which has the ticker symbol “IWY”, only holds 110 securities with around $5 billion in total assets invested.
Of course, even though it’s a smaller fund, this doesn’t mean you won’t receive exposure to high-value companies. In fact, the fund’s top five holdings include:
Besides the above companies, the IWY fund tracks the 200 largest companies in the Russell 1000 Index, which means the fund has a limited pool of choices to build its portfolio.
This smaller pool of investments has resulted in 59% of the fund’s assets being invested in its top 10 holdings, with around half of that in Apple and Microsoft alone.
5. SPDR Portfolio S&P 500 Growth ETF
The SPDR Portfolio S&P 500 Growth ETF, referred to by its ticker “SPYG”, tracks one of the largest US indices available: the S&P 500.
With an expense ratio of 0.04% and around $11 billion in total assets, the SPYG only invests in companies with positive earnings growth. This is because, to be included in the S&P 500, a company must have positive earnings for the previous four most recent quarters.
The SPYG growth fund’s top five holdings include:
How to decide which growth fund is best for you
As previously mentioned, there are thousands of different growth funds on offer for you to choose from. While some were mentioned above, there are others out there that may better suit your investment style, so how do you decide which fund is right for you?
Well, this all depends on your goals for investing in the first place. For example, some may offer more growth potential in return for more risk. So, if your risk tolerance is low, you may want to invest in a lower-risk fund.
There are also actively- and passively-managed funds on offer. As the name suggests, actively-managed funds are overseen by fund managers, who typically aim to outperform indices through research and analysis. Due to this, actively managed funds may have higher fees to compensate the fund managers.
When you’re looking at growth funds, you typically want to invest in one that is cheap and has plenty of volume and assets. This way, you will give yourself the best chance of growth on your investment.
The best growth funds are typically those that have a high price-to-earnings (p/e) ratio, as this may result in the best long-term capital growth.
Funds vs shares: which offers the best growth?
Again, this all depends on your investment goals. Typically, shares are easy to buy, and since you are the one deciding where to invest your money, you have complete control over your investment portfolio management.
However, individual shares typically come with more risk. This is because you need to do your own research before investing in shares. So, if you make a poor investment or the market takes a sudden downturn, there’s a chance you could lose value on your investment.
Shares may also offer less diversification than growth funds. This is because, when you invest in a fund, you are getting exposure to all the constituent companies in the fund.
Better yet, if you want your investments to gain exposure to some of the companies with the largest market capitalisation but can’t afford to buy shares in these companies directly, a fund could be your way to do so for a reasonable price.
For example, if you wanted to invest in Google’s parent company, Alphabet, but can’t afford the $2,130 share price (as of the morning of 14 June 2022), you could instead invest in a fund that holds shares in Google, giving you exposure to the company without having to pay the high share price.
Also consider: Funds v.s shares?
What exactly is a growth fund?
Simply put, a fund is a type of pooled investment that invests in different companies or tracks stock indices. When you invest in a fund, the money you put in will be used to invest in different companies or the underlying index the fund tracks. When these companies perform well, the value of the fund increases, as does your investment.
Growth funds, however, are still a type of fund, though these typically aim for growth over value or income. Instead of offering investors a high dividend yield, a growth fund may try to appreciate capital over a longer period.
When it comes to risk, growth funds are typically higher risk than other funds, such as value funds. While they do offer more growth as a trade-off for this risk, they are usually better suited for holds between 5 and 10 years.
How do growth funds work?
As mentioned, growth funds will typically aim to invest in high-growth stocks that have the potential to grow faster than other companies on the market.
For example, if the average company in the technology sector was growing at an expected earnings per share of 4% over the next five years, a tech company that was expected to grow at a rate of 8% over the same period would likely be included in a growth fund.
There is also typically more risk involved with growth funds. This is because, while a company may be experiencing high growth just now, this may not be the case in five years’ time.
What is an expense ratio?
An expense ratio has been mentioned several times already in my article, but what exactly is this?
Well, an expense ratio is a measurement of how much of a fund’s assets are used for administrative and other operating expenses. To figure out the expense ratio, a fund divides its operating expenses by the average value of its assets under management.
When operating expenses are higher, this reduces the fund’s assets, thus reducing the return to investors. So, you should keep in mind that if you want to invest in a fund with a higher expense ratio, this may eat into your potential returns.
From an investor’s viewpoint, you typically want a growth fund to have an expense ratio of around 0.5% to 0.75%. Any expense ratio above 1.5% is typically considered high and may deter investors.
What is better: growth or income funds?
Of course, you may be interested in income funds rather than growth funds. As the name suggests, this is a fund with the purpose of supplying investors with an income, typically through dividends from the companies they’ve invested in.
This means that an income fund will usually aim to invest in stable companies that pay competitive dividend yields.
So, if your goals for investing are to wait a long period of time for appreciation on your initial investment, then a growth fund is for you. However, if you want your investments to pay a regular income, then you might want to think about selecting an income fund instead.
Types of growth funds
As mentioned, there are plenty of different funds on offer, but did you know that some function differently than others? Continue reading to find out how these different funds vary from each other, and which would best suit your investment strategy.
Exchange-traded funds (ETFs)
Growth exchange-traded funds (ETFs) are a type of fund that track the performance of a particular index, commodity, or sector. They act much like regular shares in the sense that they are traded on the same marketplaces and the price can fluctuate throughout the day.
One of the downsides of growth ETFs is that you may face higher costs and charges when trading them. This is because, since they are overseen by fund managers, these charges include a management fee.
Read my comprehensive guide to ETFs if you would like to find out more.
Index funds are similar to ETFs, with a few key differences. The performance of an index fund wholly depends on the performance of the stock market index it tracks.
They typically aim to match the growth of an index, and the price of the fund is based on the total price of all securities held within the fund.
Index funds also tend to be a more passive investment when compared to other types of funds. This is because they need less management since they stick to holding the investments listed on the index they track.
A mutual fund is another type of pooled investment, much like index funds and ETFs.
However, unlike ETFs, mutual funds can only be purchased and sold at the end of the trading day. While you can usually place an order for a mutual fund at any point of the day, the trade won’t be carried out until the trading day is finished.
Mutual funds also tend to be more actively managed. This means that there is a fund manager who decides on how the money is invested in order to try and beat the market.
As the name suggests, bond funds are another type of pooled investment vehicle, but instead of tracking an index or market, they track bonds.
If you have always wanted to invest in bonds, then a bond fund may be the most efficient way to do so. This is because, unlike individual bonds, bond funds don’t have a maturity date for repayment, meaning the initial amount invested can fluctuate.
Typically, investors of bond funds are supplied an income with interest payments from the bond securities. Since there are usually many different types of bonds in the fund, the interest income may vary from month to month.
A balanced fund is another type of pooled investment, though they typically aim to hold a mix of individual stocks and bonds.
Balanced funds tend to allocate a fixed split between stocks and bonds. For example, a balanced fund may hold 60% shares and 40% bonds.
While these do offer growth, they also offer income, so if you’re looking for a pure growth fund, then one of the previously mentioned funds may better suit you.
However, they are typically lower risk than some of the other funds that have been mentioned. So if you have a lower risk tolerance, a balanced fund may be what you’re looking for.
- Growth funds are a type of pooled investment that aim to offer investors growth on their investment.
- There’s a wide range of growth funds to choose from – see my list of five of the leading ones below.
- Since the fund manager will spread money across different investments, growth funds offer access to an instantly diversified portfolio.
- Growth funds have an expense ratio, which shows how much of the fund’s profits are used for administration costs.
Best growth funds FAQs
What is the best fund for growth?
The best fund for growth all depends on your investment style. For example, some may offer more exposure to companies with high market capitalisation, but with more risk.
Some may offer exposure to more mid-cap stocks, with less risk as the trade-off.
It is always worth researching the different growth funds on offer you make any investment decisions.
Are growth funds safe?
The safety of a growth fund depends on the fund you decide to invest in.
If you are looking for capital growth, but have a low tolerance for risk, then a growth fund may be for you. This is because a growth fund will typically have a wide variety of investments, thus spreading the risk.
However, if you have a higher tolerance for risk, you may want to think about investing in individual growth stocks.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall risk appetite and financial circumstances.