WHAT ARE GROWTH FUNDS?
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Growth funds are stock funds structured to
appreciate over time.
The objective is for the stocks to grow in value, as opposed to
paying regular dividends to their investors (although they sometimes do pay
them). Growth funds are made mostly or entirely of stocks because stocks have a
high potential to grow in value. Primarily, growth funds invest in common
Growth funds typically pay little or no dividends. Instead, the
fund managers choose stocks they believe will cause the value of the fund to
grow quickly and steadily over time. Often the stocks they choose do not pay
dividends. A corporation may reinvest its surplus earnings to expand the company
rather than pay dividends. Growth fund managers favor stocks of this type of
corporation. This helps the funds grow. Rather than collecting dividends,
investors who choose growth funds intend to make profits by reaping the
increased value of the appreciated funds when they are sold?a process that may
take years or even decades.
The volatility of growth funds is relatively high. This is
because the companies they invest in are, overall, more vulnerable to market
In the next section, you will learn how a fund's managers
seek out stocks for growth funds.