Understanding Growth Funds

A growth fund is a stock fund managed primarily in pursuit of capital gains — that is, most of the profit sought by the manager takes the form of higher share prices rather than dividends paid. The manager of a growth fund is interested in finding industries that are rapidly expanding due to economic, business, or social trends and individual companies that are managed so effectively that they are growing quickly. A growth fund may invest in stocks of large, small, or mid cap companies. The success of the fund depends heavily on the expertise of its manager and his ability to pick winners from among the many companies competing in a particular industry.
For example, one industry for which many economists predict a bright future over the next two decades is pharmaceuticals, which manufacture drugs, medicines, and other health-related products. As the large baby boom generation born in the 1940s and 1950s ages, their need for medical care is likely to increase, and pharmaceutical companies are positioned to enjoy growing sales and profits.
The manager of a growth fund probably wants to follow the pharmaceutical industry closely. However, to be successful, the fund manager also needs to identify the individual companies in the industry whose stock is likely to perform best. Key to successful fund management is staying informed about the management of the leading pharmaceutical firms — Pfizer, Merck, Glaxo, Lilly, and others — and listening for news about breakthrough medicines in development at each company.
The growth fund manager who can accurately guess which firms are destined to do well in the years to come will make profitable stock selections, and investors in his fund will benefit accordingly.
A growth fund is usually a good investment for the long-term investor. For example, if you’re investing for a retirement that is 20 years or more in the future, you may want to put half or more of your investment money into a growth fund, which should benefit from upward trends in the economy during the coming decades.