Growth Funds - Mutual Funds, Index Funds, and ETF's

Growth funds use a strategy that seeks earnings growth and capital appreciation over dividend payments. These types of funds look for companies that have a solid history or potential for above average earnings.

You can invest in these funds through traditional mutual funds, index funds, ETF's or, if you have access to them, hedge funds. You can usually get them through your stock broker or financial adviser.

The types of companies that growth funds look for tend to be more risky, which also means it will be more volatile. Accordingly, investing in growth funds require a longer term period to ride out the volatility and to make up for short-term losses that it will inevitably incur.

One of the main things an investor is giving up for growth are dividend payouts. A perk of buying shares in many of the big blue chip companies is that they often pay an annual dividend payout to it's shareholders out of it's earnings.

Instead companies in these funds will generally reinvest their earnings, also known as retained earnings, back into the company for expansion and to boost it's growth.

Fund Categories

There are many kinds of growth funds that you can invest into. Here is a brief description of a few of them. There are also a list of links to some of the more popular funds out there.

Many of these categories also come in value funds and blend funds, which are both alternatives to growth. In addition, many investment options are a hybrid of these categories.

For example, you can have an ETF that tracks a growth index comprised only of small cap companies. The Rydex S&P SmallCap 600 Pure Growth ETF is a good example of this.

Small Cap Funds

Small cap funds seek out companies with a market cap of $2 billion or less. They look for small companies with have hot growth prospects or potential to be bought up in an acquisition by a larger company.

These small cap funds are basically looking for the next Google or Microsoft. Historical data has shown that small caps offer the best chances for growth in the long term.

Small caps tend to be more volatile because they are riskier assets. So again, you have to be able to stay in the market for a long period of time to ride out the volatility.

Large Cap Funds

Large cap funds are comprised of companies that have a market cap of more than $10 billion that still have the potential for growth. Large cap funds tend to be less volatile than small cap funds because larger companies tend to be less risky.

For the risk factor the investor is trading in the potential returns as well. But if you're looking for a way to grow your portfolio with companies with above average growth and earnings, but want to keep your money in stable ships, this is the way to go.

Index Funds

Index funds are mutual funds or ETF's that follow a particular index like the S&P 500 or theDow Jones Industrial Average.

There are index funds that track the many growth stock indices out there. One of the more popular ones, for example, is the Vanguard Growth Index Fund Investor Shares (VIGRX), which tracks the MSCI US Prime Market Growth Index.

One of the great benefits to investing in an index fund is that they are passively managed. Because they track a particular index that already has stocks built into them, the managers of these funds don't have to do as much work. That means their expense ratio is going to be less, which translates into usually much lower management fees.

ETF - Exchange Traded Funds

You can also find many of these growth funds in an ETF as well. ETF's are mutual funds that are traded on a stock exchange just like stocks in a company. And just like buying stocks, you just do it through your stock broker or online brokerage account.

One of the main benefits to this method is that you don't have to pay management fees. You just pay your commission on the trade. In addition, you can trade ETF's all day long instead of just once a day, at the end of the day like mutual funds.

Investing in growth funds means taking on riskier assets and dealing with more volatility.  If you are looking for a safer avenue, check out value funds or blend funds.  

Value funds seek to find and buy shares in undervalued companies.  Fundamental analysis is used more in this scenario, with less emphasis on rallys or hot growth.  The more famous value investor would be Warren Buffett.

Blend funds use a mix of value and growth to attain a sold investment portfolio.  There are even mutual funds that are dividend growth, which seek growth but also look to give a payout for shareholders.

There are almost an endless number of options for those wanting to invest in growth funds. Before making any decisions, potential investors should seek out professional advice from a financial adviser and do due diligence on their prospective investments and mutual funds.