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Growth mutual funds, as the name implies, invest in growth stocks. A growth stock is typically a younger, burgeoning company with earnings or revenue thats growing faster than the average firm. Instead of paying out dividends to investors, growth firms usually choose to reinvest their earnings to support rapidly expanding operations or develop new products and services. As opposed to more mature dividend-paying stocks, which aim to provide regular income to stockholders, gains from growth stocks come from an increase in the stock price over time. So the objective of the fund manager is to pick stocks with the potential for continued earnings and sales growth which will hopefully drive the stock price ever higher. The reason to own a growth mutual fund is to capitalize on bullish momentum across most of the stocks in the funds portfolio. Some stocks within the growth fund may exhibit bearish tendencies at any given time, but you want the overall basket of stocks to demonstrate an upward trend. Some growth funds concentrate on companies with a similar market capitalization, such as small-cap, mid-cap or large-cap firms. Others will hold stocks from firms of varying size. You may be bullish on a particular sector or industry because it is in favor with investors or it is undergoing widespread growth. Be certain to choose a growth mutual fund that best matches your specific sentiments. Regardless of intention, the market can always behave counter to your analysis. Owning a growth fund can result in losses if the mutual fund declines in value. The steeper the decline, the greater the loss will be. Instant diversification Because growth mutual funds are usually made up of many different stocks, your investment, in essence, is instantly diversified. In general, price movement for a growth mutual fund may be less volatile than an individual stock. But be carefuldiversification doesnt mean safety. Look at a chart for any given index and you will invariably see certain periods of significant decline. So dont buy a growth mutual fund during uncertain times and naively expect safe haven from the next financial storm. Diversification doesnt guarantee a profit or ensure against a loss. Active management Growth mutual funds are actively managed, meaning the mix of stocks held by the fund are continually reevaluated and possibly changed by the fund manager. As a result, costs are incurred while researching companies or trading in or out of stocks when the fund manager adjusts the holdings of the growth funds portfolio. As a result, the expense ratio (ongoing fees associated with owning a mutual fund) tends to be higher for growth funds than for passively managed investments like index mutual funds. This is because passively managed funds hold mostly the same mix of stocks over the long-term. Lower maintenance over the long-term Some investors choose mutual funds as a long-term, lower-maintenance trade than choosing individual stocks. If you dont have the time or inclination for picking growth stocks, then buying a growth mutual fund may be a
When to Run It
Moderately to strongly bullish Degree of sentiment: +2 to +3 Learn it. Trade it. Open your TradeKing account today!
Potential Risks
An investment in a growth mutual fund could lose money over short or long periods of time. A growth mutual funds performance could be hurt by: Stock market risk, which is the chance that stock prices overall will decline or the risk that the fund may underperform the overall stock market. Investment style risk, which is the chance that returns from small-cap, midcap, or large-cap stocks will trail returns from the overall stock market. Manager risk, which is the chance that poor security selection or focus on securities in a particular sector, category, or group of companies will cause the growth fund to underperform relevant benchmarks. Other risks specific to your mutual fund, so be sure to read the prospectus carefully before investing.
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Time Horizon
Investing in growth mutual funds tends to be a longer-term play (one year or preferably more). The goal here is relatively consistent growth over time, rather than spectacular short-term gains. Remember to check which fees for different share classes will apply given your time horizon.
When to Get In
Having time on your side is advantageous when investing, so in general getting in sooner than later is preferable. However there are some timing considerations for your initial investment. If you are using dollar-cost averaging, you would adhere to your periodic investment schedule. Watch the overall market trends When you begin your investment in a growth mutual fund, make sure youre not trying to catch a falling knife. In other words, dont enter the order when the overall trend is still heading down and try to precisely nail the bottom. Its best to have some sense that the bulls are loose before you buy a growth mutual fund. Ideally, you want to see a bullish trend underway or to dive in after a bear market or shorter-term correction has bottomed
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out and then has resumed upwards.
Investment Management
Because you have a professional fund manager managing your trades, this is a relatively low-maintenance strategy. You buy in through either a lump-sum or periodic investments, after reading the funds prospectus. Since youre investing in an actively managed fund, there are likely to be modifications in how the fund is managed over time. So review a current prospectus periodically to be aware of any noteworthy changes. Any time you make an investment, you are obviously expecting the results to be outstanding. But as you know, that will not always be the case. Even the most carefully chosen mutual fund can go south in a hurry, resulting in losses. You should also remain aware of trends in the broader markets. If bearish times hit, growth mutual funds will tend to decline at a rate faster than the market at large. So be prepared for this increased volatility. If its more than you can stomach, evaluate your portfolio and make changes to fit with your overall financial picture. Its also a good idea to keep an eye on your funds performance relative to its peers. Of course past performance is not an indication of future results, but if your fund is underperforming, you may want to consider switching to one thats been better managed on a historical basis. If you are scaling in or scaling out of this strategy with dollar-cost averaging, you need to be sure to stick to your investment schedule over the life of the investment. Deviate from your schedule only if there is a significant shift in your personal investment plan or financial picture.
Volatility Factor
Since some stocks can go up while others go down, a growth mutual funds price movement will tend to be less volatile than the average growth stock. Oftentimes growth funds hold investments in innovative, less-established companies frequently within new areas of the economy. So its important to recognize that growth mutual funds tend to be more volatile than other types of mutual funds, such as index funds, value funds or income funds. If you invest in a narrowly-focused growth fund which concentrates on a particular sector or industry, you are likely to experience even more volatility. While growth funds tend to perform better than other funds during bull markets, during bear markets they have the potential to decline much more rapidly than their more conservatively managed counterparts. So you should be comfortable with the increased risk and confident in a continuing bull market to run this strategy. Although it is possible that a growth mutual fund may have lesser volatility than another investment, it does not mean it is low risk.
Tax Ramifications
There are several ways your mutual fund investment can impact your tax liability. Read How Taxes Affect Mutual
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TradeKing Tips
Be wary of earnings season and news events Just prior to and during quarterly earnings seasons, when corporate earnings are announcedJanuary, April, July and Octobermajor indices tend to be more volatile than usual. Furthermore, other types of announcements can cause increasing volatility as well. If earnings are coming up, the Fed is about to hold a greatly anticipated meeting regarding interest rates, or you're generally unsettled by increased volatility, you may want to hold off with making that initial investment and see what happens. On the other hand, if you have good reason to think positive news will boost your upcoming investment, by all means get in before the next big rally gets underway. Either way, be sure you are making an active decision to stay in or out during a time of increased news releases because prices are likely to experience greater volatility during these times.
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$4.95 for online e quity and option trade s, add 65 ce nts pe r option contract. Trade King charge s an additional $0.35 pe r contract on ce rtain inde x products whe re the e x change charge s fe e s. Se e our FAQ for de tails. Trade King adds $0.01 pe r share on the e ntire orde r for stock s price d le ss than $2.00. Se e our C om m issions and Fe e s page for com m issions on brok e r-assiste d trade s, low-price d stock s, option spre ads, and othe r se curitie s. Q uote s are de laye d at le ast 15 m inute s, unle ss othe rwise indicate d. Mark e t data powe re d and im ple m e nte d by SunGard. C om pany fundam e ntal data provide d by Factse t. Earnings e stim ate s provide d by Zack s. Mutual fund and ETF data provide d by Lippe r and Dow Jone s & C om pany. * C om m ission-fre e buy to close offe r doe s not apply to m ulti-le g trade s. Multiple-leg options strate gie s involve additional risk s and m ultiple com m issions, and m ay re sult in com ple x tax tre atm e nts. Ple ase consult your tax advise r. Implied volatility re pre se nts the conse nsus of the m ark e tplace as to the future le ve l of stock price volatility or the probability of re aching a spe cific price point. The Greeks re pre se nt the conse nsus of the m ark e tplace as to how the option will re act to change s in ce rtain variable s associate d with the pricing of an option contract. The re is no guarante e that the fore casts of im plie d volatility or the Gre e k s will be corre ct.
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