How growth fund works

The investors need a tolerance for risk and a holding period with a time horizon of 5 to 10 years. Growth fund holdings often have high price-to-earnings (P/E) and price-to-sales (P/S) multiples. This trade-off from investors is the above-average earnings gains and revenue these companies produce.

There’s also an element of risk to consider with growth funds. While a company might be trading at a much higher growth rate now, this doesn’t mean it will be able to sustain the same rate of growth 5 years down the line. The stocks will take a hit if growth slows for any reason, be it a general market downturn or product failure. Growth funds have price-to-earnings ratios and high price-to-sales .

It is important to know the types of stocks qualify for inclusion in a growth fund, and how do investors see returns? Stocks that grow at a faster rate than their peers could be included in this type of fund.

additionally, investors usually don’t receive dividend payments from growth stocks. This is because rapidly growing companies prefer to take these earnings and reinvest them into the business instead to further accelerate growth.

Let’s say if the average tech stock is currently growing at an expected earnings per share of 4% over the next 5 years, a tech company expected to grow at an 12% rate over the same period would be considered for inclusion in a growth fund.