What are Growth Mutual Funds?

Companies that generally have high P/E ratios, high expected growth rates, and that generally do not pay dividends are likely to be found in the portfolio of a growth mutual fund.

Growth mutual funds invest in companies that are developing and/or have a high potential for growth, as the name implies. Growth Funds are typically riskier because the companies they invest in have a heightened chance of both profiting and failing.

Growth companies are usually defined as companies which have very high Price to Earnings ratios (say, over 25), because investor confidence in their earnings potential has been priced-in by the market.

They also will not usually have a history of paying dividends, and may not until years later. This is largely due to the fact that a large portion of their earnings are being reinvested in the business to continue growth in the forms of new products or facilities or employees.

Earnings could also be going toward paying off any debt obligations they incurred while starting up. Growth funds tend to thrive at the opposite time that value funds do. Growth investing may require a higher risk tolerance and longer time horizon than value investing.

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