When capital appreciation over the long term takes precedence
over dividend payouts, growth funds become a natural choice for
investors. A single minded focus toward capital appreciation is
what best characterizes growth funds. These funds focus on
realizing an appreciable amount of capital growth by investing in
stocks of firms whose value is projected to rise over the long
However, a relatively higher tolerance to risk and the willingness
to park funds for the longer term are necessary when investing in
these securities. This is because they may experience relatively
more fluctuations than other fund classes. Nonetheless, in depth
research and professional management are what make mutual funds a
much safer proposition as compared to directly investing in growth
The growth funds can be divided into three segments depending on
their market capitalizations. Thus, investors get to choose from
Large cap, Mid cap or Small cap funds. This choice can be made
depending on what suits the investor the most. For a better
clarity, let's take a look at what each of these market
capitalizations suggest and then compare their returns.
Simply, market capitalization of a company is calculated by
multiplying the shares outstanding with the market value of each
share. The result will give us the market cap, and will decide if
the company can be categorized under large cap, mid cap or small
Generally, companies with more than $10 billion market cap are
considered a large-cap firm. Mid-cap companies have market
capitalization within $2-$10 billion. A small-cap company is one
that has market capitalization below $2 billion.
However market capitalization in case of funds does not reflect the
size of the fund's assets. Instead, it is an indication on what
type of securities the fund invests in.
A large-cap fund will invest in large-cap companies, i.e., those
having market cap above $10 billion. These funds provide the least
amount of risk. Most often, the large cap funds tend to duplicate
the benchmarks - like S&P 500. These funds are ideal for
investors with long-term investment timeline.
These funds invest in companies generally having market
capitalization within $2-$10 billion. These funds are riskier than
large-cap funds but are less risky than small-cap funds. Mid-cap
funds are not very susceptible to volatility in broader markets.
These are ideal investment options for investors looking for high
return potential that comes with lower risk than small-cap funds.
Small-cap funds generally invest in companies having market cap
lower than $2 billion. The companies, smaller in size, offer growth
potential and their market capitalization may increase
subsequently. Small-cap funds are believed to have higher growth
potential. Small-cap funds are a good choice for investors seeking
diversification across different sectors and companies. Investors
with a high risk appetite should invest in these funds. (Read:
Small-Cap Funds Giving High Returns
Performance of Various Market Caps
Small-cap and mid-cap funds generally outperform large-cap funds.
This is true as we already discussed that small-cap funds offer
larger growth potential and large-cap funds are generally long-term
investments. However this year, large-cap funds have been
performing well. Large-caps have in fact outperformed small-caps
this year and over the last one-year period.
If we look at the returns, the mid and large-cap seem to be the
best bets in terms of return.
Return % calculated using Google Finance
Growth Funds to Buy
Returns (in % as of Aug 20)
Russell 2000 (RUT)
Russell 2000 Growth (RUO)
Morningstar Small Cap Index (MSCP)
Morningstar Small Growth Index (MSGR)
Russell Midcap (RMCC)
Russell Midcap Growth (RMCCG)
Morningstar Mid Cap Index (MMCP)
Morningstar Mid Growth Index (MMGR)
Russell 1000 (RUI)
Dow Jones U.S. Large-Cap Growth Index (DJUSGL)
Morningstar Large Cap Index (MLCP)
Morningstar Large Growth Index (MLGR)
For investors looking to invest in growth funds, we will suggest
here the top growth funds from each market capitalization.
These funds carry a Zacks Mutual Fund Rank #1 (Strong Buy) as we
expect the funds to outperform its peers in the future.
Remember, the goal of the Zacks Mutual Fund Rank is to guide
investors to identify potential winners and losers. Unlike most of
the fund-rating systems, the Zacks Mutual Fund Rank is not just
focused on past performance, but the likely future success of the
These funds are also among the top gainers for this year so far.
Large-Cap Growth Fund
ClearBridge Aggressive Growth A
(SHRAX) invests in growth companies that may, or, are already
witnessing earnings growth higher than that of firms in the S&P
500 Index. It invests in prominent and large companies whose
earnings are expected to accelerate in the long run.
The fund has returned 12.7% year to date. Top holdings of the fund
include Biogen Idec Inc (BIIB), UnitedHealth Group Inc (UNH) and
Forest Laboratories Inc.
Mid-Cap Growth Fund
Rydex Series Trust Mid-Cap Advantage A
(RYAHX) seeks to provide 150% of the return of the daily
performance of the S&P MidCap 400 Index. The fund invests most
of its assets in mid-cap companies, or the ones with market cap
range of the S&P MidCap 400 Index.
The fund has returned 7.5% year to date. Top holdings of the fund
include Equinix Inc (EQIX), United Rentals Inc (URI) and SL Green
Realty Corp (SLG).
Small-Cap Growth Fund
BlackRock Global SmallCap Investor A
(MDGCX) seeks capital appreciation over the long term. The fund
invests a large share of its assets in small cap equity securities.
The issuers of these securities must be identical to firms included
in the MSCI World Small Cap Index. The fund also invests in foreign
securities, including ones from emerging countries.
The fund has returned 5.6% year to date. Top holdings of the fund
include Vestas Wind Systems A/S (VWS), Africa Oil Corp and Pitney
Bowes Inc (PBI).
About Zacks Mutual Fund Rank
By applying the Zacks Rank to mutual funds, investors can find
funds that not only outpaced the market in the past but are also
expected to outperform going forward. Learn more about the Zacks
Mutual Fund Rank in our
Mutual Fund Center
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BIOGEN IDEC INC (BIIB): Free Stock Analysis
UNITEDHEALTH GP (UNH): Free Stock Analysis
EQUINIX INC (EQIX): Free Stock Analysis Report
UTD RENTALS INC (URI): Free Stock Analysis
SL GREEN REALTY (SLG): Free Stock Analysis
PITNEY BOWES IN (PBI): Free Stock Analysis
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