Here are the ground rules for what the IRS will allow you to do.
What is a growth fund?
A growth fund is a mutual fund invested mostly in companies with above-average growth, with the goal being capital appreciation rather than yield income and dividend payouts. A growth fund is expected to appreciate more over the long term than the broad market.
Growth funds are meant for high-growth businesses that reinvest their income in research, development, acquisitions and expansion. Most growth funds provide a higher potential for capital appreciation, but at above-average risk. The high-reward versus high-risk strategy makes growth funds suitable for investors who are not planning to retire soon. This is because investors need to have high risk tolerance and a five- to 10-year holding period.
Growth fund holdings usually have high price-to-sales and price-to-earnings ratios.
Growth funds, along with blend funds and value funds, are one of the leading types of mutual funds. Growth funds, however, are more volatile than blend or value funds. Foreign growth funds are readily available to investors who want to benefit from global growth. These funds focus on international stocks, often posting strong earnings and revenue growth. Consumer and technology sectors are the most common investment opportunities for international growth funds.
Example of growth fund
The Fidelity Blue Chip Growth Fund (FBGRX) is among the top large-growth mutual funds, with nearly $22 billion in assets. It invests in big U.S. companies with long-term growth potential, such as Amazon, Google, Apple and Gilead Sciences, a research-based biopharmaceutical company.
The fund has returned nearly 25 percent over the past year and over 13 percent over the past three years. It is heavily invested in technology, health care and consumer cyclicals such as retail, entertainment, housing and automotive.
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